Wait... There's a Genie in my Economy!

What do the following have in common?

• International Paper
• United Airlines
• Google
• Facebook
• Twitter
• Amazon EC2
• Kickstarter
• 3D Printing
• Genies

Friction.

More specifically, they each help to reduce the friction between all of the things that must be in place to get something that you want.

• International Paper - What does it take to get the paper in your printer? 
• Rights to log trees. The labor to log them. The tools to cut down a tree. The knowledge to use those tools. The transports to move the trees. The machines to pulp the tree. The labor and knowledge to use the pulping equipment. The chemicals to process the pulp into paper... you get the idea...
• United Airlines - What does it take to move yourself to Japan?
• The money to buy an airplane. The knowledge to fly it. The contacts required and hours spent to negotiate the rights to take off from SFO and land at NRT. The labor and knowledge to service the aircraft... etc...
• Google - What does it take to find out about everything on the internet?
• The knowledge to create an algorithm that is helpful at finding what you want amid tons of stuff you don't. The programming skills to implement it. The knowledge to build the IT infrastructure to process and store all of the data required to run the algorithm. The servers and real-estate required to hold the servers... how easy would those be to get on your own?
• Facebook - What does it take to find all of your long lost high school friends?
• The hours and hours of phone calls to numbers in your old day runner (they still make these?) hoping that their parents still remember you and still live there. Or trawling through phone directories looking for the right Joe Smith... ugh...
• OR build your own content site which will attract half of the planet AND get them to list their high school... pretty simple...

The remaining companies or topics flip the equation a bit as they are more general tools for reducing friction towards the end of doing something else.

• Twitter - How could I publish my thoughts to "everyone" at a reasonable cost?
• I could never mail a letter, call by phone or place enough radio and TV ads to do this. What would it cost to generate the lead list and qualify the leads to do this in a more focused way?
• Amazon EC2 - How do I start a s/w business that scales without major capital outlays?
• How else can I get enough computers to scale my SaaS business to profitability without the friction of convincing someone to front a significant amount of money to purchase and administer a server farm?
• Kickstarter - How do I find funding to raise capital to do something people want to see done?
• Am I lucky enough to be born rich? Did I get lucky enough to know powerful, rich people? Am I a good enough social engineer to find these people? Do know the right VCs? Is my product profitable enough to a VC for them to consider? What would it cost to build the audience of millions who are engaged enough to put money on the table - sight unseen?
• 3D Printing - How do I make a complicated, custom physical part in low volume (qty 1)?
• The money and space to buy a CNC machine plus the experience and knowledge to operate it? Or the hours spent to find a machine shop that will do a low volume run, now, for a reasonable price?
• Genies - How do I do anything with anyone, anywhere at any time?
• You have 3 wishes...

The interesting thing about removing the friction around doing "something else" is that it enables new ways for people to do things for themselves and, ultimately, find others who might want those things. Which they then might trade something for (like money). Which sounds sort of like an economy.

Take that to its logical conclusion where friction is, genie-like, reduced to near zero between all people and the resources / skills they hold and what is the purpose of a corporation as we know it today? We could do anything for ourselves by finding and coordinating the right people.

Maybe this does not happen in my lifetime, but the idea of friction seems like a powerful filter for looking at the value of any product or service that you are trying to create today. If it is not reducing friction then you're heading the wrong way.

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Thanks to Gabe Newell for throwing the lightning bolt which fused the 10,000 threads in my brain into a coherent idea.

Take a look at this talk if you have an hour to spare.

Why is Valve structured as it is?

What is the purpose of a corporation in recent history and today?

Good stuff. 

Cloud Computing, Virtualization, IaaS, PaaS and SaaS - Part 2

In part one of this post, I looked in to the question of why cloud computing is important. In this post, I will look into the question of what cloud computing is.

NIST's definition of cloud computing gives a useful model for deciding what is and is not a cloud deployment:
 "cloud computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction."

But to understand what "the cloud" is really made up of, it helps to look at how cloud computing is packaged and sold.

• Infrastructure as a Service (IaaS)
• Platform as a Service (PaaS)
• Software as a Service (SaaS)

Infrastructure as a Service (Iaas)
In this cloud offering, the seller provisions virtualized compute, network and storage upon which the buyer installs his own operating system and software. This is most easily thought of as buying bare computers and storage onto which your own IT dept will put everything required for your specific uses.
A few major vendors who offer these products are: Amazon Web Services, RackSpace and AT&T Synaptic Hosting.

Virtualization software is key to making IaaS feasible. Without virtualization, physical hardware would need to be provisioned for each customer. This would make it prohibitively expensive to quickly provision, re-provision and scale resources to meet customer needs.
The major virtualization s/w vendors include VMWare (ESX), Microsoft (HyperV) and an open source virtualization solution Xen.

More on virtualization in another post.

Platform as a Service (Paas)
In the platform level cloud offering, the seller provisions some combination of operating system, middleware and runtime packages which enable the buyer to develop and run applications of their choosing. This can be thought of as buying access to services which enable programs to easily access the resources they need to run.
Vendors provide a variety of offerings in this space. A few major offerings are below:

• Google App Engine provides a number of runtime environments for web application developers.
• Amazon Simple Storage Service (S3) provides file based storage to any application which needs it while Amazon Elastic Block Store (EBS) provides block level storage for applications the need direct storage access (like DBs).
• Microsoft Azure provides access to a few runtime envrionments,  SQL DB services for applications which need DB services and the virtual network fabric required to link together multiple server's services.

Software as a Service (Saas)
In this level of cloud offering, the seller provides the buyer with access to end applications while hiding the infrastructure, middleware and runtime components. Pretty much every time you hear about a "web application" being offered by a company, you are seeing a SaaS product.
There are probably thousands of SaaS offerings available so covering any significant fraction of the space here is futile. But here are a few examples of SaaS offerings:

• Web email - from google, Yahoo, etc
• Office 365 and Google Apps - On line productivity apps for creating, accessing and collaborating with others on a variety of document types (word processing, presentations, spreadsheets, picture editing, etc).
• Sustainable Supply Chain (SSC) - Supply chain survey management for corporate social responsibility reporting from CSRware.
• Facebook and Google + - public social networking tools for keeping tabs on your friends around the world.
• Socialcast, Clearvale , Jive and Spigit -  Enterprise social networking tools for keeping abreast of news and status, smoothing workflow, fostering collaboration and spurring idea generation in a corporate context.

One additional consideration is which user base a cloud deployment is intended to serve. This leads to the ideas of: Private, Public and Hybrid Clouds

• Private cloud = services and (often hardware) are strictly for a single company's use. Frequently this implies that the company consuming the services will deploy the cloud services on hardware behind their corporate firewall.
• Public cloud = services are available for all users anywhere. Though users may need to pay for services... This is the context in which most people experience the cloud because of the heavy reliance start-ups offering SaaS products have on public cloud services.
• Hybrid cloud = multiple cloud systems connected in such a way as to allow programs and data to be easily moved between private to public clouds.

Cloud Computing, Virtualization, IaaS, PaaS and SaaS - Part 1

What is cloud computing and why is it important?

On the question of importance, cloud computing addresses several business problems.

Perhaps the most mundane problem that cloud computing addresses is one of cost for getting applications up and keeping them running.

• Availability 
• Because of the underlying technology used in cloud computing (Virtualization - more on this next post.) it becomes relatively easy to implement failover and high availability for servers. This makes the customer experience better (fewer interruptions) and allows more routes to addressing business critical applications (lowers barrier to entry on some enterprise applications).
• Application deployment & maintenance 
• Depending on the level of the cloud you engage at (Infrastructure, Platform or Software - more on this next post), the level of IT expertise required to use the applications / services you want can be greatly reduced. Software patching, upgrades, hardware provisioning and maintenance is left to the cloud providers who have this expertise on staff.

These "mundane" aspects of cloud computing enable significantly less mundane capabilities. The most immediate of which are the new business models that become feasible.

• Software start ups galore
• Because compute power can be purchased on-demand and in relatively small units, capital costs for starting a software company are significantly reduced. This enables more players to try more things in search of the next big thing.
• F2P (Free to Play), Freemiums and ad-driven businesses
• Because the marginal cost of adding users to a centralized s/w application can be nearly zero when deployed in a dynamically scalable infrastructure such as the cloud provides, companies can explore business models that "give away" software, or more precisely: give away access to software, while closely tracking and tailoring the user experience more easily. This leads to businesses that thrive on micro transactions within the software or on ad revenue instead of from sales of the software itself.
• On-line special events
• Relatively low cost and rapid provisioning of compute, network and storage resources allows for companies to generate increased community engagement or media attention by using this burst capacity to host periodic special events. For a small fraction of the cost of buying and setting up the h/w and software required to gain this capacity, the same buzz generating potential can be realized.
• Mobile
• By using the relatively limited compute power of networked mobile devices to drive the user interface and pushing the computationally intensive tasks to servers in the cloud, the capabilities of mobile devices become nearly unlimited. This creates a new class of applications (e.g. voice recognition, navigation, etc) for entrepreneurs to explore and market, driving sales of mobile computing hardware (e.g. smart phones and tablets) or of the applications (as apps or as services) themselves.
• Distributed work force, virtual desktops and collaboration
• Because public cloud resources can be accessed from any internet connected device and data storage is easily centralized, the cloud makes it more feasible than ever to provision specialized applications to anyone, anywhere, to keep company data centralized and provide tools by which physically separated groups can easily interact and exchange information in real time in order to improve productivity.

As Corporate Social Responsibility (CSR) and sustainability concerns increase, the "green" aspects of cloud computing also become more important.

• Economies of scale in "green" data centers may mean that renting capacity via "the cloud" is greener than you can afford on your own.  
• Making an efficient data center requires high up front capital and expertise costs. Considerations like the ones below are more affordable by large businesses or by dedicated cloud hosting companies where the risk associated with the capital costs are more acceptable for the long term return.
• efficient server h/w
• low energy and passive cooling strategies
• occupancy based lighting, energy efficient lighting fixtures and daylighting strategies
• green power purchase agreements
• on-site generation via renewables (e.g. co-gen, bio-fuel based fuel cells, PV, Solar thermal, etc.)

Next time some details about the the "what" part of the question.

B-Corporations are Real in California

It looks like the legislation making B-Corporations legal in California has passed and one big name corporation has signed up.

Read this previous post for more thoughts on what this means.

It's a good step towards making it legal, by changing the focus on shareholder primacy, for a public corporation to even consider doing what you or I would see as mandatory in our dealings with other people and with our communities.

Flexible Purpose Corporations - California making it legal for corporations to "care" about something other than money

In a previous post, I wrote about shareholder primacy (the law governing corporations actually requires the CEO to pursue shareholder profit even at the expense of other corporate goals or values) and how that makes it very difficult for a corporation to pursue goals that are not directly tied to increasing bottom line profits.

According to this Green Biz blog, California is getting ready to pass a law (2011 SB201) which makes it legal for corporations established in California "...to include a social and environmental mission that is given equal weight, perhaps even greater weight, than profits..." It protects CEOs and boards of directors in pursuit of such goals and it provides shareholder mechanisms to enforce the pursuit of the same.

That's an improvement.
If you can get companies to stop incorporating in Delaware.
By which I mean that "traditional" motives, training and culture need to change in addition to the law. Profit is so deeply rooted in American culture and history that it is difficult to even see how enthralled by the old ideas we are.

A better way for electric cars? A Better Place.

What are the two main things you worry about with electric cars?

1. Price
2. Range

Gasoline is great because it is a well established, subsidized fuel with very high energy density (1.3x10^8 J//kg). That makes it easy to carry around and get pretty far with. Plus, when you run out, there's always a gas station somewhere nearby. Price and range... not a problem.

Electric cars are limited by their batteries. Li-Ion battery's energy density is nowhere near as high as gasoline (5.2x10^5 - 7.2x10^5 J/kg - gasoline has >180 times more energy per kg of "fuel"). Even accepting that a gasoline engine is 30% efficient vs a 90% efficient electric motor (i.e. total energy that would be converted to work per kg of fuel is 3.9x10^7 J/kg for gasoline vs 6.5x10^5 J/kg for Li-ion), that yields ~60 times more energy per kg of "fuel" from gasoline than from batteries. So to get the same range as a gasoline car (from one tank of fuel), requires either:

1. A very large battery -or-
• If a typical car holds 15 gal of gasoline (@ ~2.7kg/gal = 40.5 kg) , a battery that contains the same effective energy would need to weigh ~2430kg ... where a Honda Civic weighs about 1270 kg... not practical to carry or to pay for.
2. The ability to "refuel" the battery in less time than refueling a car 
•  Even with the best recharger possible, it takes hours (~4 hrs for a Tesla roadster) vs maybe 5 minutes to refill a gas tank.
• With a 100 mile range per battery charge, that would require about 4 battery charges per tank of gas (assuming CAFE standard of 27.5 mpg and 15 gal tank = 412 mile range). Sixteen hours (battery) vs 5 minutes (gasoline) (assuming both cars start empty).

 Those are pretty bad starting places to catch up from.

So Shai Agassi has an idea: Treat the electric car like a cell phone.
The customer buys miles and gets a subsidized car. The batteries are the medium for the "minutes." You never own them, you just use them.
Which means you can now swap batteries because you don't care about the specific battery that you have, only that you're getting the mileage you're paying for.
Suddenly the range problem goes away (~1min to change the battery).
Suddenly the price has a means of being subsidized (ala cell phone contracts that keep the price of the phone low for the end user).

Kind of like Blue Rhino propane tanks ... but way cooler.

And he created a company Better Place to do it:

• Get the cars built
• Get the battery swap system figured out
• Get the infrastructure in place
• Prove to the world that it can work

Check out this video (or the video below) of the system working in Tokyo. It's real.


So, admittedly, it only works where you have the infrastructure, but it certainly gives a new direction for addressing the two big problems of EVs.

A Framework for Sustainable Business

Sustainability

"The ability to provide for the needs of the world's current population without damaging the ability of future generations to provide for themselves. When a process is sustainable, it can be carried out over and over without negative environmental effects or impossibly high costs to anyone involved."

This definition is nice but how to make it actionable?
A checklist would be nice, but that is probably too simplistic. Rather, there seems to be a few key ideas that lead from this definition that give a framework for answering the question: "Is this sustainable?" in whatever context it might arise. The first question is: sustainable for whom? Which leads to...

Triple Bottom Line (TBL)

""People" (human capital) pertains to fair and beneficial business practices toward labour and the community and region in which a corporation conducts its business. A TBL company conceives a reciprocal social structure in which the well-being of corporate, labour and other stakeholder interests are interdependent."

""Planet" (natural capital) refers to sustainable environmental practices. A TBL company endeavors to benefit the natural order as much as possible or at the least do no harm and curtail environmental impact. "

""Profit" is the economic value created by the organisation after deducting the cost of all inputs, including the cost of the capital tied up."

To understand if something has unacceptable costs to anyone involved, you must first identify all of the stakeholders. The simplest embodiment of this idea is in the triple bottom line: Expanding accountability to the stakeholders rather than just the shareholders. Who are the stakeholders?

• Your people
• Your planet
• Your profit (i.e. the economy in which you live and on which you depend).

Once you begin trying to account for all the stakeholders' costs and benefits you are led naturally to...

Full Cost Accounting (FCA)

1. Accounting for costs rather than outlays
2. Accounting for hidden costs and externalities
3. Accounting for overhead and indirect costs
4. Accounting for past and future outlays
5. Accounting for costs according to lifecycle of the product

FCA requires explicit acknowledgement of costs that are typically ignored in traditional cost / benefit analyses. It requires systems thinking to understand the scope and source of these costs. The points of FCA that seem, to me, to be particularly relevant to sustainability are:

• What does it really cost to obtain, use and replace a resource? Natural resource usage is a good example: prices reflect extraction costs rather than replacement costs (it's not sustainable if I run out with no replacement). So using resource price as the cost of resources is insufficient to account for the impact of using that resource. Oil is cheap to extract but difficult to replace.
• Externalities are acknowledged as costs of business rather than someone else's problem. Passing the cost to someone else does not make the cost go away - it's just theft from that person. A good example is the effect of overworking employees. What is the cost of a crumbling family or of the loss of a parent from workplace induced illness or stress related disease? In traditional accounting, such concerns are not the business' concern so efforts to improve employee well-being are are difficult to justify.
• Future outlays to deal with preventing externalities are also planned for. This encourages reuse and encourages building recycling and collection into the product design and business model. It is good business to have people buy a new cell phone every year, until you have to pay for the safe disposal of every one of those phones or the impact on health and environment loss from improperly disposed phones. Wouldn't it be more economically effective to plan on collecting and reusing the materials?

If you include in the costing the environment as the source of all resources and that a better environment results in more plentiful, higher quality, more productive resources (material and labor), then you reach...

Cradle to Cradle Design

"Cradle to Cradle design perceives the safe and productive processes of nature’s ‘biological metabolism’ as a model for developing a ‘technical metabolism’ flow of industrial materials. Product components can be designed for continuous recovery and reutilization as biological and technical nutrients within these metabolisms."

This is about making the world better with each unit produced rather than just making things "less bad."
While Cradle to Cradle emphasizes product design, to me the idea logically extends to sustainable business processes as well: How do I design a business process that makes my people and customers more fulfilled rather than just "less abused" in pursuit of the company's goals?

• Trust marketing: respect your customers and their interests to build more business.
• Foster and direct intrinsic motivation (Drive... see TED video below) to get the most from employees.

Put another way: sustainability seems to be about approaching business with Aikido in mind (blend and direct) rather than with Taekwondo in mind (block, strike and smash).

In the thrall of old ideas

This TED Talk by Sir Ken Robinson on changing education to better suit the needs of today struck me because of its relevance to the thread of intrinsic motivation and discovering what each of our "things" are: what is my superpower?

The key ideas that I took away were:

• Dis-enthrallment: Recognizing the assumptions that we do not question and questioning them.
• Linear vs Organic processes: Go through education in this order ("University begins in Kindergarten") and you are set for life vs. organizing to meet the need for diversity in type and timing of talent.
• Conformity vs Uniqueness:  Fast food (McDonalds) vs customized food (Zagats and Michelin Star rated restaurants) and the "value" associated with each.
• The need to move from a mfg / industrial based model of education to one based on agriculture - "Human flourishing is not a mechanical process but an organic process.... [Like farmers, the goal is to] create the conditions under which they [students] will begin to flourish."

As the limits of the "old" economic model become clearer, the limits of the assumptions on which that model is based also become clearer.
I don't know what the "new" rules are or what they will become.
I do know that as the various systems in which we live crash and stumble towards a new (if temporary) equilibrium, dealing with this kind of chaotic rearrangement will require more flexibility than the old system allows.
Ideas like these speak some truth for me in dealing with the new condition.

What (Other) Kind of Business Could I Build Around Energy Dashboards?

In my last post, I came up with a bad model for an energy dashboard business based on annuities paid by the utilities companies for energy saved. However, there did seem to be a bright spot for selling the dashboards to the utilities to install themselves. Looking at that a little more closely...

According to the US Energy Information Administration, CA electric utilities generated ~11.1M metric tons of CO2 in 2008. The three year average (2006-2008) was ~10.2M metric tons.
Using the same number of customers in CA and 10% savings factor as assumed before, implementing energy dashboards would save ~ 1.1M tons of CO2. Spread across the ~12.9M customers in CA at the current price for carbon (~$19/ton CO2e), that is about $1.68/customer.

If you add that to the ~$35.6/customer savings in direct generation costs, that is ~$37/customer*yr.
So if a utility is willing to accept a 3 year pay back period, then each installation could cost up to ~$111, for a TAM of around $1.4B for serving all of CA.
Not too bad as long as you have an alternative revenue stream planned for after the initial sale (e.g. s/w license fees for maintaining the dashboard customer feedback, data aggregation, reporting, etc).

The utilities' ROI increases the more effective the actual energy savings and the less expensive the installation. So to compete here you'd need to prove that your system will create and maintain better energy reduction outcomes per $ of installed equipment. If you could do it all in s/w leveraging customer's existing h/w or without any installed h/w, that would be the best.

What Kind of Business Could I Build Around Energy Dashboards?

In a previous post, I wrote a bit about why so many smart grid cleantech companies were focusing their efforts on utilities instead of consumers: the power of big numbers leverages small efficiencies into large $ amounts.

With that knowledge, what kind of business could I build around selling energy dashboards to the utilities?

A few assumptions, some of which are probably pretty optimistic just to simplify things without really changing the conclusion (I hope):

• I want to run a business based on annuities (utilities pay me a "subscription") rather than hardware and s/w services (utilities buy my h/w and s/w directly).
• I manage to get 100% of electric utilities in CA to put my product in 100% of customers' buildings [~12.9M customers]
• The utilities agree to pay me 50% of the saved costs of generation [~$17.82/customer*yr]
• A customer dashboard costs my business $35 installed.
• I take out 15% profit and have 10% overhead costs to run finance, HR, facilities, etc. 
• 35% of my workforce is engineering or other functions not directly customer facing / supporting.
• It costs $200k/yr to hire, compensate and retain each employee on average.

 Two key numbers come out of this:

• $453M - The cost to install the equipment at all the customers' locations. That's serious start up capital or a very slow ramp of the business. Starting isn't going to be easy.
• 23,000 - The number of customers per non-engineering employee that would have to be supported assuming I could start the company, pay off my debt and get to a steady state. If I'm paid actual savings, that means I need to get all the customers to actively use their dashboards and change behavior. The challenge of getting a diverse population (the state of CA) to sustainably change behavior over time with such a ratio is staggering.

As of that weren't enough, it would make sense for the power utility to shift their baseline over time rather than pay me for the same level of performance forever as it would be cheaper to address the problem themselves. This means that I'd not only have to get people to achieve good energy savings (target 10% on average - per the previous post), I'd have to increase this over time to avoid going out of business or avoid drastically shrinking the business.

I think I can throw this business plan out as a case where annuities are a bad business model.

However, that $453M number does suggest that selling h/w and analysis / customer feedback infrastructure to the utilities might be a better way to go. Maybe I could even write a game to make engagement fun.

Photo credit: Leften on Flickr ... not a picture of CA ...

Sustainable business and the IPO

Once public, a corporation is subject to share holder primacy. This can lead the corporation to do things which may not be in the company's, employees' or planet's best interests.

So if you wanted to be free of share holder primacy concerns and take the company private again what might that mean?

Barring the cases where the company fails and share prices drop resulting in a different set of stakeholders coming in and taking over (private equity takeover), let's assume this means buying back all of your shares on the open market.

Assuming that you used your IPO cash to grow the company (i.e. the cash is gone), you would have to do this through cash on hand and net cash flow. Is this reasonable to do?

An immediate problem that looms is that the higher the earnings, the higher the stock price. So the way you get more cash, makes the company more expensive. Let's pretend that you could freeze a company's stock price and income so that cash flow and stock price stay more or less fixed. Could you buy your company back even then?

Taking Google, a wildly successful company with huge net cash flow, as an example:
As of April 2010, they have a market cap of ~$181B with ~$24.5B in cash and net cash of ~$2.2B/yr (averaged over the last three years).
This means it would take >70 years to buy out their capitalization even if it could be frozen.
That doesn't sound very feasible.

So, while this is vastly oversimplified, it does suggest that going private for a successful company is no small matter. If sustainability is a key concern, going public seems to be potentially difficult act to "recover" from due to the high cost of shaking loose the shareholder primacy yoke.

I need to read Rework and see what 37Signals has to say about staying private.

Photo credit: wallyg (flickr)

The ah-hah moment on Smart Grid Tech Business Models

A quick survey of a handful of smart grid tech companies who are creating devices for consumer use shows that they are mostly targeting the utilities rather than the consumers (home owners). Why?

Looking at the numbers I've come up with, it's clear that this is a game of very large numbers. Small percentages of large numbers are still large numbers. So you need a customer who can leverage those very large numbers.
The consumers cannot.
The utilities can.

Pulling data from the DOE site on total generation in CA, number of customers in CA and cost of generation. Then including the power mix for PG&E and taking that as an average for CA, you get a non-surprising result.

Assuming a 10% consumption reduction via electric usage dashboards:

• The average consumer would see a $80/yr savings.
• The combined generators of power in CA would see a $461M/yr savings.

It's hard to get a home owner excited about $80/yr.
It's probably a little easier to get a utility interested in a few hundred million $ per year
... and this doesn't include planning for Cap & Trade...