JOBS Update, as promised

Last night Engine Advocacy sent out the first of its hopefully frequent Legislative Updates, addressing the JOBS Act and Startup Act. Mike Masnick of TechDirt also posted his latest thoughts, which include discussion of the amendments announced yesterday by Senator Wyden that would add a number of trade-related provisions to the bill. Here’s the NYT’s coverage.

Some have argued this is the Senate Democrats’ way of bringing attention to the bill. Others see it as a way to kill it off by adding in very controversial issues that would force a Presidential veto.

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Whoa, let’s talk about the JOBS Act

UPDATE: replaced an incorrect link (h/t Craig)

For most of last week, the Hattery team has been hotly debating the merits and risks of the JOBS Act. We’ve had a lot of trouble figuring out how assiduously we can support this legislative package.

All of us very much support the ability for entrepreneurs to raise funds for their businesses by asking for small investments from “non-qualified” investors — the general public. Think of it as Kickstarter with equity. Such activity is currently illegal, which disadvantages entrepreneurs who don’t have access to traditional capital sources. We believe it will spawn many great products and companies while also letting the entire U.S. population join in not just using these products but also sponsoring them and sharing in the upside.

However, the current bills, which have passed through the House with resounding support, will likely do the same in the Senate, and have the White House’s strong endorsement, also have a poison pill of sorts. Ill-intentioned entities could exploit this legislation to mislead investors in both public and private markets. In making it easier to use diversified sources of capital without the regulatory overhead, there are new vulnerabilities.

My concern is that the tech community — spurred by a petition hosted by AngelList — has rallied behind this election-year legislation. But I think that the AngelList team, and most of the people who have signed their petition, believe this legislative package is narrowly targeted toward startups as we know them: well meaning organizations with inventive ideas that just need some cash to get started. Even Engine Advocacy, an organization with which I am closely affiliated, has come out in relatively strong support, albeit before the full text of the bill was released. And while I think the bill is directionally correct, I also want to make sure we’re taking careful steps towards creating policy, especially with regard to financial regulation. We need to make be certain that we as a community cannot be accused of helping railroad a bill through the Congress which, in a few months or years, yields scandal. And as citizens, we need to be certain we are advocating for legislation that supports and protects us all; as entrepreneurs and as investors.

Let’s take a pause. Tomorrow the Senate will begin debate and two amendments that strengthen protections in the bill are brought to a vote. When we know more, we’ll see where to go. I’ll also likely post some additional thoughts. Nevertheless, it is great Congress is focused on issues of importance to startups and I hope this is a trend that continues.

Want to know more?

Codes were meant to be broken

No encryption method is ever unbreakable. Advancements simply require more computational power to crack. Privacy is time-dependent, and the ways in which we deal with data security and data privacy should reflect this.

The other day, I was casually told “AES is unbreakable.” Which is pretty intriguing to me. I want to believe that there is a universal encryption standard that can really protect my data, and yet, this also sounds a lot like saying the Titanic is unsinkable. So I started wondering out loud to the Hattery team whether or not we can ever really have an unbreakable encryption scheme.

I’m no mathematician, but I believe that by the very nature of cryptography, you can never build a scheme that can’t be broken. And that only partially has to do with the math itself. There’s also the element of human creativity and tenacity — if we built it, we can take it apart. The data you retain now and believe to be private because it is encrypted is not a reality that will last forever.

AES, the Advanced Encryption Standard, was first published in 1998, which is to say, the algorithm that powers the standard was published then. You can read more on Wikipedia if you are interested in the details, but the core idea here is that AES is based on an algorithm like all cyphers. And it is single-key encryption, which means the same key you use to encrypt is used to decrypt. For AES, this means 128, 192, or 256 bit keys.

Typically you break codes in one of two ways. Either through brute force — trying all the possible key permutations — or by essentially reverse-engineering the algorithm to find weaknesses. AES keys would take millions of years under current computational conditions (processor efficiency) to brute force attack. While pretty much all widely-used encryption schemes have been broken using a variety of methods, AES remains the gold standard. 192 bit keys have the National Security Agency’s seal of approval for Top Secret data. AES has been broken through side attacks that exploit flaws and vulnerabilities in the system running the encryption scheme, but never directly.

Nevertheless, the notion that it is unbreakable just seems immensely foolish. As processor computational output improves — which inevitably it will continue to do — the potential for a brute-force attack becomes more and more credible. Nevermind that we are still human and it is only a matter of time before other mathematicians figure out the vulnerabilities in AES and crack that or reverse-engineer the algorithm. So those embarrassing emails you thought you had protected? Forget it. Your grandchildren will almost certainly be reading them.

Whatever is built by man can be taken apart by man — it’s just a matter of time. If the data that we protect is valuable enough, then people will always be hacking at it. Conceiving of everything on the internet as breakable will change how we deal with data security and data privacy. Like everything we do, encryption should be creative and constantly reinvented.

We have some time. Just don’t get too comfortable. And let’s keep building better algorithms.

The Scene is a Distraction

The focus should be on building great products. Everything else, like attending events and conferences, should be secondary.

Recently the question came up as to whether my partners and I are part of the “startup scene”. The easy answer is yes, since our firm is focused on investing in and helping to grow startups. But the more I thought about it, the more I realized I found the phrase and the thinking behind it troublesome.

When I think about what we do at Hattery it’s pretty clear: we help build great companies that want to create products and services that will serve millions. We want our investments to be accessible and useful. Whether they are medical devices or micropayments, the objective is the same: we invest so that companies can grow and have significant impact, and so that we can be a part of that growth.

But what we do is not a scene; it’s a serious business. There are stakes; not just the obvious financial stakes, but also the resources, talent, and time spent by the entrepreneur and the startup’s team in pursuing one opportunity over another. I want to hope it is obvious, but building great companies doesn’t come from being in the scene; it’s the result of innovative entrepreneurship that builds with a heads-down focus on the product and the user. But that seems to be missed in practice.

I’m still not sure what the scene really is, but my hunch is that we use it to refer to events like launch parties and hot conferences, maybe even demo days. In essence, who you know, not what you know. The scene might also refer to those of us on the “inside” of the startup world who trade on the latest gossip of who’s in and who’s out, and which company is about to drop a massive C round.

That’s not to say entrepreneurs shouldn’t attend events and conferences. Making connections is always going to be critical to a startup’s survival, especially where that includes meeting investors and potential employees, and even gaining some earned media exposure. That makes sense. But the main focus should be on building a great product. The startup scene may be a gateway to getting the product out there, but a lot of time and resources that are used to attend events would be much better invested in creating truly great products. Far too often that math is miscalculated.

At Hattery, our raison d’etre is not the scene. That said, you will find us at events from time to time. But any member of our team at any event we attend will be able to explain their purpose there with ease —  because being there helps our entrepreneurs and their companies or our investors. Any other reason and we are losing focus.

I’ll be going to SXSW this year, but I’ll be keeping my focus: I am going to speak on a panel to raise awareness and get more entrepreneurs involved in Engine Advocacy. More to come.

Engine Advocacy: Honeywell, Nest, and the Next Wave of IP Protection


Intellectual property is vitally important to innovation, but there comes a point where patents are so broad that they stifle new products and technologies. So seems the case when large, long running companies can quash younger innovators with costly, time-consuming patent lawsuits.

There’s been…

Economics of a Daily Deal

The future of the so-called ‘daily deals’ space emerged in a significant way today.

This morning Groupon published a daily deal for $39 toward $100 in-flight credit on Virgin America for flights to Chicago from San Francisco or Los Angeles. That flight needed to be taken before March. At first blush, the Hattery team was pretty excited — a lot of us are from Chicago. And given going to Chicago between now and March isn’t really ideal weather, it seems like a good way for Virgin to fill empty seats. Win-win.

But the deal was just for flight credit, not for any specific fare. So immediately, as the deal was purchased, buyers began booking flights to Chicago. And as every individual booked (or perhaps as blocks of bookings were made, depending on how Virgin handles demand pricing) the ticket price went up. And before you knew it, Virgin had helped fill a lot of empty seats at a relatively low cost to them. In this case Groupon provided some marketing power to Virgin, but more importantly, helped Virgin with a very real supply problem.

Which means that ultimately, Groupon found a customer for their client’s product — not for a small business client that could barely afford to offer the deal (and only did so in the name of marketing and customer acquisition), but rather a company looking to optimize its operations. I’d like to imagine this is the future of the deals space. In a lot of ways, it is a game for users: get there first to get the best deal; and a service to providers: get access to users who will help fill underutilized inventory and capacity. I believe this is part of the future for this space.

Of course the users who lose are those who bought the deal at the end of the day. They could probably have taken a cheaper flight to enjoy a beautiful July weekend in the Windy City.

UPDATE: It was pointed out to me that depending on how much demand there ends up being for flights between now and March from non-Groupon coupon holders, Virgin could stand to actually profit from this deal via demand pricing. Which would make the strongest argument for why daily deals should move out of the marketing-cost category.
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Chasing markets, not ideas

I recently attended a handful of incubator demo days during demo day season. I was really taken aback by how few companies even remotely struck my interest. In fact, there was only one exception. Far too many of these startups are focused on chasing markets. Typical story: The wedding industry is a big business…great, let’s somehow bring some part of it to the web. And then claim the entire wedding market is the market opportunity for said startup.

Put simply, that’s not how it works.

Good companies change the market, they change how it is defined. The rules do not apply. They are not features. The market number in these cases is interesting, but perhaps the least compelling. Show me a product, show me why it changes a market; show me how it grows a market, redefines a market, or eliminates a market and creates a new one. Case-in-point: if Etsy pitched on the market for handmade and vintage goods, investors would have balked. Instead, they built a community that changed a market, redefined it, and built a new one. And that made them a brand we know and love and have welcomed into our homes.

Why we’ve gone dark

Starting today, we’ve decided to blacken out the Hattery homepage and ask visitors to visit and call their Senators. As you probably know, the United States Senate is currently slated to vote on PIPA — the so-called Protect IP Act — on January 23rd. This bill has been accelerated through the legislative process at incredible speed, with the technology community for the most part excluded in any part of helping shape it. This has only changed in recent days.
We plan to leave our homepage dark for at least the next day, if not longer, along with many other great tech companies, to raise awareness of what is happening and what can continue to happen if all of us in the tech community do not step up and get more involved.
There are many great resources to learn more about PIPA and its equivalent bill in the House of Representatives, SOPA, including Engine Advocacy’s site. At its core, we believe PIPA threatens to change the Internet as we know it for the worse; threatening innovation and the rapid transfer of ideas and creations.
To that end, the entire Hattery team has been working to combat this legislation. Our partners have travelled to Washington — where I am now — and elsewhere to meet with lawmakers and speak on panels educating them and their staff on the issues and consequences. Our creative team has helped put together sites and tools, including StoptheWall.  And yet another member of our team has been a substantial part of getting Engine Advocacy going, an organization that will — going forward — work to educate policymakers on the issues impacting the startup community and educate those in the startup community about issues in Washington, our state capitols, and our cities. Our dark page is in many ways a tribute to the team’s ongoing efforts and we are glad we can be part of so many other great companies doing the same.
To really make a difference, please visit and call your Senators asking them to take a hard look at PIPA and recognize the inherent costs of this legislation.

Real estate agents & disruption

What makes a good real estate agent? From the client’s perspective, surely, a good agent is one who finds you what you want at the right price-point. Unfortunately, the agent’s objectives are often not in line with the client’s. Financial incentives suggest that real estate agents should try to talk clients into homes, condos, office buildings, etc., as quickly as possible and at the highest asking price possible. Speed improves the bandwidth they have for additional clients and higher prices increase their commissions, which are calculated as a percentage of signing price. Neither make for a good client experience — in fact, the current system actively discourages an honest and mutually beneficial agent/client relationship.  
As one who is fresh from the real estate ring — our firm recently signed a lease for our new space in the SOMA district of San Francisco — the need for more informational resources for the consumer seems obvious. Although we were fortunate to find a great agent and had a positive experience, the industry is a minefield for many a consumer. Rents in our area are out-of-control, largely driven up by the crush of startups trying to move into the South Park area. A good realtor in a market like this is vital, especially for a start-up business without major capital to spend on rent.
So why can’t we find a way to align how realtors work with incentives that are on the side of the client? Why not a system that rewards realtors that find or negotiate for their clients the best deal?

This seems like the sort of dilemma the web (and a little data analysis) can finally solve. For the home purchase market this should be easy. If we compare asking prices to actual sale prices, normalizing economically and geographically, we can then aggregate this data by realtor and start to get a pretty good idea of which realtors are helping their clients negotiate the best purchase prices.  There’s no reason we can’t do the same for the commercial lease market. Of course, this requires some time spent gathering a certain amount of relevant data, which is not always that easy to get. Deal data is not typically made public, and bad agents are never going to be enthusiastic to share those numbers. Good agents will, though, and simply having that data available will allow for consumers to see whether there is a disparity between the deal they got and the best deals being given.

Ultimately, this will make the best better as they attract more and higher spending clients, improving their economic position and incentives — but in a way that is far more in line with client objectives.

One liner pearls

I’m a fan of Twitter. Reviewing my feed gives me a really quick snapshot of what is going on and what is truly trending and among my interests. It helps me feel like I have my finger on the pulse of the world (or what passes for my world).

But I find the one liner pearls of ‘wisdom’ from prominent figures, particularly VCs and celebrity entrepreneurs in Silicon Valley absolutely maddening. They are usually stating the obvious in 140 characters or less. They are terse, but neither pithy nor insightful. And yet when I look at the stats, they are retweeted with reckless abandon. It makes Twitter less relevant to me. But it sure puts into perspective who to take advice from, and how little self-awareness these folks have. If I had less of an ego about my career, I would post a few examples here, but I won’t. You know what I am talking about.