I might humbly suggest that those journalists and reporters in both the traditional and financial media are largely missing the grander point on Apple the company and Apple the stock.  Running businesses is a lot more than seeing what ratios look like on financial numbers and saying whether something is undervalued, fairly valued or overvalued.

Fundamentally, and whether it is said this way or not, Apple has a monopoly position in digital music.  It’s easy, it’s fun, it’s cool and nobody I know anywhere has any desire to forklift upgrade their digital music, throw away their investment in purchases and ripping CDs in to iTunes or ever starting over again on another platform.  There may be an exception to every rule, but ever since Apple launched the iPod and “got it right” on MP3 players, nobody has even dreamed of challenging them in this area … not Dell with their media player, not Microsoft with Zune … no one.

As part of iTunes, Apple has made photos, videos, music, movies and now mobile applications simple, easy and bundled under one roof.  The anchor to this roof is most definitely music, and this anchor is something that no other smart phone manufacturer has anywhere.  Google and Android, Palm and Pre and Research in Motion and Blackberry just don’t have this natural anchor and draw to their application stores like Apple … so don’t expect them to be able to make the in-roads that people believe in the smart phone mobile application world.  Unfortunately there is just no other compelling reason to go to their mobile application stores as there is with Apple.  Sorry, but there just isn’t.

Ultimately, a pre-existing and trusted billing relationship exists with Apple’s consumers and the loyalty to the brand now goes way, way, way beyond the religious cult that it used to be.  As a result, Apple isn’t just winning the battle for mobile devices, but it’s also beginning to get people to shift from their Wintel PCs back to the Mac platform in meaningful numbers.  I expect that this trend will not only continue, but that it will also accelerate.  I’m not suggesting that Macs are suddenly going to be back on top in terms of market share, but I am saying that the “halo effect” of Apple’s mobile dominance is paying dividends on their Mac desktop and laptop numbers.  Plus, the next great battle of the larger PC war is going to be when the smart phones fundamentally become the PC of the future.

In parallel, Apple has a massively deep managerial bench of talent and it is my contention that most of the iPhone and iPod product and services designs and offerings were created during the period that Steve Jobs was completely out of the company.  My understanding from some detailed research and discussions with many inside Apple was that Jobs wasn’t even around day to day when the iPhone was created internally as his medical issues were already well underway … just not publicly known.  Steve Jobs might get credit for everything great at Apple, but the reality is a far, far different story and the number of fantastic individuals that are involved and responsible for the success of these mobile platforms at Apple goes way, way beyond any one person.

The fundamental aggregate talent in engineering, management and operational execution is what has driven Apple to greatness … not any one man … and not even Steve Jobs.  Apple didn’t miss a beat when he was out and won’t now that he’s back or if he’s out again.  The rich multiples Apple’s stock gets are a result of this dominance, not a cause of it.  The multiples will also look modest with the penetration of the world’s next large computing platform: the smart phone.  While Apple, Palm, Google and Research in Motion will alll have a market share, Apple owns 75% of all application downloads in the world and has an even larger dominance in music.  These market shares are like GOOG and search, MSFT and Windows, CSCO and routers/switches, EBAY and auctions.  Said another way … nobody can challenge this any time soon.

I will personally admit to having a great respect and admiration for Steve Jobs.  I think that he’s a great visionary and leader and wish him well with his health and most recent recovery.  I believe that he and Larry Ellison of Oracle should get much more credit for what they’ve done in the 2000s than Michael Dell at Dell, John Chambers at Cisco, Bill Gates at Microsoft and others of that decade as they grew their businesses in novel, unique and meaningful new ways after the decade of “a rising tide lifting all boats” was over and the penetration rates of PCs, cell phones and the Internet (broadband connections) rose from virtually nothing to more than 100%.  Said another way, from no market to a mature market … all in a single decade.  That penetration rate is about to be replicated again in the coming decade, but this time with the migration from cell phones to smart phones instead of the migration from circuit switching to packet switching from a decade ago.  Steve Jobs will remain an icon and a brilliant visionary.  However, with or without him Apple is strong, deep and well positioned to dominate as the monopoly that it is … even if most people don’t realize it just yet.  As a result, I like LEAP call options and/or core common stock holdings for Apple as it is clearly already a winner and will continue to be one through 2020 very, very easily.

Remember Lee Iacocca, the man who rescued Chrysler Corporation from its death throes?  He’s now 82 years old and has a new book, ‘Where Have All the Leaders Gone?‘ 

Lee Iacocca says: 

‘Am I the only guy in this country who’s fed up with what’s happening? Where the hell is our outrage? We should be screaming bloody murder! We’ve got a gang of clueless bozos steering our ship of state right over a cliff, we’ve got corporate gangsters stealing us blind, and we can’t even clean up after a hurricane much less build a hybrid car. But instead of getting mad, everyone sits around and nods their heads when the politicians say, ‘Stay the course.’

Stay the course? You’ve got to be kidding. This is America, not the damned, ‘Titanic’. I’ll give you a sound bite: ‘Throw all the bums out!’ You might think I’m getting senile, that I’ve gone off my rocker, and maybe I have. But someone has to speak up. I hardly recognize this country anymore.

The most famous business leaders are not the innovators but the guys in handcuffs.. While we’re fiddling in Iraq, the Middle East is burning and nobody seems to know what to do. And the press is waving ‘pom-poms’ instead of asking hard questions. That’s not the promise of the ‘ America ‘ my parents and yours traveled across the ocean for. I’ve had enough. How about you? 

I’ll go a step further. You can’t call yourself a patriot if you’re not outraged. This is a fight I’m ready and willing to have. The Biggest ‘C’ is Crisis! (Iacocca elaborates on nine C’s of leadership, with crisis being the first.)

Leaders are made, not born. Leadership is forged in times of crisis. It’s easy to sit there with your feet up on the desk and talk theory. Or send someone else’s kids off to war when you’ve never seen a battlefield yourself. It’s another thing to lead when your world comes tumbling down.

On September 11, 2001, we needed a strong leader more than any other time in our history. We needed a steady hand to guide us out of the ashes. A hell of a mess, so here’s where we stand.

We’re immersed in a bloody war with no plan for winning and no plan for leaving. We’re running the biggest deficit in the history of the country. We’re losing the manufacturing edge to Asia, while our once-great companies are getting slaughtered by health care costs. 

Gas prices are skyrocketing, and nobody in power has a coherent energy policy. Our schools are in trouble. Our borders are like sieves. The middle class is being squeezed every which way. These are times that cry out for leadership.

But when you look around, you’ve got to ask: ‘Where have all the leaders gone?’ Where are the curious, creative communicators? Where are the people of character, courage, conviction, omnipotence, and common sense? I may be a sucker for alliteration, but I think you get the  point.

Name me a leader who has a better idea for homeland security than making us take off our shoes in airports and throw away our shampoo? We’ve spent billions of dollars building a huge new bureaucracy, and all we know how to do is react to things that have already happened.

Name me one leader who emerged from the crisis of Hurricane Katrina. Congress has yet to spend a single day evaluating the response to the hurricane or demanding accountability for the decisions that were made in the crucial hours after the storm. 

Everyone’s hunkering down, fingers crossed, hoping it doesn’t happen again. Now, that’s just crazy. Storms happen. Deal with it. Make a plan. Figure out what you’re going to do the next time.

Name me an industry leader who is thinking creatively about how we can restore our competitive edge in manufacturing. Who would have believed that there could ever be a time when ‘The Big Three’ referred to Japanese car companies? How did this happen, and more important, what are we going to do about it?

Name me a government leader who can articulate a plan for paying down the debt, or solving the energy crisis, or managing the health care problem. The silence is deafening. But these are the crises that are eating away at our country and milking the middle class dry. 

I have news for the gang in Congress. We didn’t elect you to sit on your asses and do nothing and remain silent while our democracy is being hijacked and our greatness is being replaced with mediocrity. What is everybody so afraid of? That some bonehead on NBC news or CNN news will call them a name? Give me a break. Why don’t you guys show some spine for a change?

Had enough? Hey, I’m not trying to be the voice of gloom and doom here.  I’m trying to light a fire. I’m speaking out because I have hope - I believe in America. In my lifetime, I’ve had the privilege of living through some of America’s greatest moments. I’ve also experienced some of our worst crises: The ‘Great Depression,’ ‘World War  II,’ the ‘Korean War,’ the ‘Kennedy Assassination,’ the ‘Vietnam War,’ the 1970’s oil crisis, and the struggles of recent years culminating with 9/11.

If I’ve learned one thing, it’s this: ‘You don’t get anywhere by standing on the sidelines waiting for somebody else to take action. Whether it’s building a better car or building a better future for our children, we all have a role to play. That’s the challenge I’m raising in this book. It’s a “Call to Action” for people who, like me, believe in America’. It’s not too late, but it’s getting pretty close. So let’s shake off the crap and go to work. Let’s tell ‘em all we’ve had ‘enough.’

Make your own contribution by sending this to everyone you know and care about. It’s our country, folks, and it’s our future. Our future is at stake!!

Check out Phunware when you get a chance (www.phunware.com). 

An enterprise branded mobile application production company.  Primary focus on the iPhone/iTouch platform from Apple, but also covering the Pre (Palm), Android (Google) and Blackberry (Research in Motion).

Facebook page at http://www.facebook.com/pages/Phunware-Inc/84131788172.

Twitter feed at http://twitter.com/phunware or @phunware for you Twitter studs.

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I refuse to get off my soap box until we see concrete steps taken to end the ongoing economic and market malaise infecting all aspects of our society and world.

Step 1 - Courage.  Politicians need to gear down the rhetoric immediately, stop pointing the finger at others, take responsibility for their own actions, stop focusing on re-election, forget about who did what to create this mess over the last 2-3 decades and simply SOLVE THE PROBLEM by doing what needs to be done.  This is no longer a Republican or Democratic issue.  It is an American issue and nobody cares about the politics of any of this any more.  Period.  Have some courage and start doing what needs to be done instead of what needs to be done to get re-elected.  Doing the right thing may not be popular, but it’s always easy to do the right thing if you actually represent who elected you to do what you’re there for Mr. Politician.

Step 2 - Innovation.  Every politician needs to embrace the creators of jobs and wealth - entrepreneurs.  Why is it so hard for elected officials to understand that entrepreneurs create the ideas that create the companies that create the jobs that create the wealth.  I’m not talking about giving this idea “lip service”.  I’m talking about making this a national imperative as important to the fabric of the President and the government as JFK’s idea to put “a man on the moon”.  I want commitment, not talk.  I want an executive and legislative focus on this initiative that becomes the foundation of the United States government, the pillar of economic stability and the fabric of all legislative, policy and monetary initiatives going forward.  I want every politician talking about this every day of the week and the media to push this as a national priority in every broadcast everywhere.

Step 3 - Investment, *not* Stimulus.  Congressional officials and the President need to invest $5 BILLION in young companies, start-ups and entrepreneurs.  I have written about this before, but I want $100 MILLION put to work in each of 50 cities across the country.  This money will *not* be in the hands of elected officials.  Rather, it will be put in to each city in the form of a local start-up and young company growth capital fund and will be managed and run by a team of selected serial entrepreneurs, VCs, private equity investors and Angel investors so that a base level of scrutinty can go in to the selection of companies for investment.  This group will be investing on behalf of the American taxpayer and will receive a 0.5% management fee and 10% equity upside for success.  Why?  Because you need talent to make good investments and monitor and assess the investments until liquidity is achieved.  You get what you pay for and “free” doesn’t scale.  We want talent and we want investment discipline.  This structure achieves that.  Further, each $100 MILLION per city selected will be invested to the tune of $250K - $1M per company so that we can get stimulus rolling on new ideas and young company building for at least 150-250 companies per market.  This $5 BILLION investment from TARP will *always* result in more economic activity than giving it to Bank of America or Citigroup to backfill holes in their balance sheets.  And, it will result in investment returns to the American taxpayer both in the literal sense and the figurative sense as well.

Step 4 - Presidential Executive Order.  President Obama … immediately issue a Presidential Order to mandate that every *primary* residential mortgage in the United States be immediately and proactively refinanced to no worse than a 4.5% interest rate on a 30 year fixed interest mortgage.  No fees, no appraisals, no applications, no qualifications, no strings attached.  Advise all banks that they have until the end of February to make this happen through their entire portfolio of loans.  Advise any bank that refuses to comply with your Presidential directive, and that has taken even 1 penny of TARP money in the past, that they will be *nationalized* on March 1st unless they have performed under this Presidential directive.  This is not going to fix everything in the world of foreclosures, but this is going to allow *everyone* in the United States to get the same starting point whether they were responsible or irresponsible in their personal finances.  Since 92% of Americans have been responsible to date, they too will actually get a benefit for having been responsible just as those that have not currently are getting a benefit that they probably shouldn’t be getting at all.  Plus, it will put a real floor underneath the housing market and provide a foundation from which to move forward from for all of us.

Right now we need bold, bipartisan action with big thinking and new thinking.  We need leaders unafraid to lead, even if their actions are unpopular and even if that means that they are not re-elected to office.  We need people that can stand up and say “We screwed up.  It is all of our faults.  It is *my* fault and I intend to fix this.  Follow me.”  Note the last statement PLEASE … “Follow me.”

We are all tired of the noise.  We are also tired of the activity.  We want results and we want them now.  Stop confusing activity with results and lead, follow or get the hell out of the way already.  This is the greatest country in the world.  Let’s start proving that again and lead the world out of this once and for all.  If anyone lacks the commitment and conviction to make this happen, then do what needs to be done for the betterment of this great nation … RESIGN.

I’ve lived in Austin, Texas, for about 6 months, and after 5 years in Silicon Valley and 7 years in Southern California (coastal Orange County), many people always ask me about what it’s like to create companies and be a serial entrepreneur.  Many others also like to ask what it’s like to work in Silicon Valley and how they too can create a version of Silicon Valley wherever they happen to live as well.

This post from mid 2006 is easily the best description I can provide for the answers to both questions.  It is a repost of a blog entry from Guy Kawasaki and the original version can be found at his blog at  http://blog.guykawasaki.com/2006/06/how_to_kick_sil.html.

I hope that he doesn’t mind my sharing this with you here, as all I can say to his post is “learn how to THINK BIG” and “AMEN”!

***** 

From the fjords of Norway to the sands of Israel to the ice of Alberta to the waves of Honolulu, many regions of the world have Silicon Valley Envy. They look at the Valley as a place where people start cool companies that generate billions of dollars of wealth (and tax revenue), create thousands of jobs, and yet does not pollute the environment (at least compared with a smokestack). The question I hear over and over is, “How can we create our own Silicon Valley?”

First, a little background. It’s taken more than seventy years to create Silicon Valley. Any politician who thinks she can create another Silicon Valley in one or two terms is overly optimistic —perhaps one has to be very optimistic, if not delusional, to be a politician, but I digress.

Second, to my knowledge, there has never been any “master plan” for the creation of Silicon Valley. What stands before you is an amalgamation of hard work, luck, greed, and serendipity but not planning. Indeed, Silicon Valley has probably worked because there was no plan.

Third, my father was a state senator in Hawaii, so I understand how politics work. I have zero interest in a political career. Just to make sure I‘m never tempted, I penned this posting to burn down any bridge to a political career. (Sometimes it’s a good thing that the Internet archives everything you ever said.)

• Beautiful, but not gorgeous, surroundings. California is beautiful. The weather is good. It’s fun to live here. No matter how great an entrepreneurial environment Cleveland creates, it’s always going to have people wanting to move away. If a place is gorgeous, like Hawaii, then the distractions are sometimes too great. Some place in the middle is what’s ideal. At the very least, it would be good to have a lousy season so that the company can be extremely productive part of the year.
• High housing prices. If houses are cheap, it means that young people can buy housing sooner and have kids. When they have kids, they can’t take as much risk and don’t have as much energy to start companies. (I have four kids—I barely have the time and energy to blog, much less start a company.) Also, if houses are cheap, it’s easier to “make it big,” and you want it to be hard to make it big.
• Cities, crowds, and high- if not over- population. The pressure of these conditions make people jealous of each other; this in turn makes them compete. Cities also bring people together to work. People can’t telecommute to a startup. People need to get together to bounce ideas off one another, argue, and cajole. Also, over-crowding gives people something to shoot for: that is, achieving success so they can get out of there.
• Absence of multi-national companies—especially the finance industry. If your companies have to compete with conglomerates or banks like Goldman, Sachs throwing money at people, it’s going to be hard to get anyone for a startup. Pity the startups in New York, London, and Singapore. Come to think of it, how many tech success stories have come from these cities? There is intense competition for employees in Silicon Valley too, but we’re using the same currency: the upside of equity, not high starting salaries.
• Life-threatening enemies. Israel is a speck of dust that has few natural resources, and it’s surrounded by real enemies. And yet the country has produced some of the world’s best technology companies. There’s nothing like a life-threatening environment to get the entrepreneurial juices flowing, I guess. If a region has to do nothing more than stick a pipe in the ground, throw a net in the ocean, clean beaches, or manage a natural seaport, it’s going to be tough to be the next Silicon Valley.

• Focus on educating engineers. The most important thing you can do is establish a world-class school of engineering. Engineering schools beget engineers. Engineers beget ideas. And ideas beget companies. End of discussion.If I had to point to the single biggest reason for Silicon Valley’s existence, it would be Stanford University—specifically, the School of Engineering. Business schools are not of primary importance because MBAs seldom sit around discussing how to change the world with great products. Mostly they care about how to get interviews at multi-nationals and consulting firms. As my mother used to say, “Best case, engineers give buildings. Best case, MBAs endow chairs.”

  On a tactical level, this means that aspiring regions should raid the best engineering schools. What do associate professors at Stanford, MIT, and Carnegie Mellon make? Whatever it is, offer them double the amount to move. Be clever: how hard could it be to recruit top flight faculty to move to your beautiful (but not gorgeous) region if you conduct interviews at MIT in the winter? This is a trivial expense compared to the various incubator, tax treatment, and venture capital fund formation schemes that are the usual solutions to the challenge.

• Encourage immigration. I am a third-generation Japanese American. My family moved here to drive a taxi and clean white people’s homes. If I had a choice between funding someone from a family who moved here from Vietnam whose father and mother run a 7-Eleven versus a descendant of a Mayflower passenger with “IV” in his name, I’ll give you half a guess as to my preference. You need to encourage smart, hungry, and aggressive people to immigrate from around the world. And to do that, you need good schools. To mix several metaphors, if you want to cover your ass, you need to open your kimono because trust-fund kids don’t make good entrepreneurs.
• Send the best and brightest to Silicon Valley. I can hear the complaints already: “This will lead to a brain drain which is exactly what we are trying to prevent.” This attitude misses the essence of entrepreneurship: it’s not about preventing bad things, but fostering good things. Would it have been better for Hawaii if Steve Case had become a lawyer at his father’s Hawaii law firm instead of moving to the mainland and creating AOL? I don’t think so.The goal is to infect them with the disease called entrepreneurship and show them that there can be more to life than “a job;” that two guys/gals in a garage can change the world; and that a lot of money = millions of dollars. Sure, some people will never return—like me. But those who do return come back with a much broader perspective on what life and a career can be. Maybe they will build another Silicon Valley because they’ve seen it done before. Here’s a dirty little secret: Silicon Valley is more a state of mind than a physical location, and you can’t alter a state of mind by staying a home.
• Celebrate your heroes. Every region needs its heroes. These folks take role modeling to an extreme; they have names like Steve Jobs, Bill Gates, Ted Turner, Steve Case, Anita Roddick, and Oprah Winfrey. Kids need heroes, so that they can say, “When I grow up, I am going to be the next Steve Jobs.” In many places, a successful person is pulled back down because of jealousy. Sure, there’s jealousy in Silicon Valley, but our way of dealing with it is to try to outdo the person, not pull her back down.
• Forgive your failures. There is no better place to fail in the world than in Silicon Valley. (Where else can you get your clock cleaned by Microsoft and become a venture capitalist and top-ranked blogger?) Indeed, some people here have made a career of failing. Some of this is cultural—failing in Europe or Asia casts a cloud over one’s family for generations. Not in Silicon Valley. Here, it doesn’t matter (within reason) how many times you fail as long as you eventually succeed. So many entrepreneurs who failed went on to create massive successes that we’ve learned that failure is a poor predictor of future results.
• Be logical. Make the challenge to create a Silicon Valley as easy as possible. Thus, a region should use it’s natural, God-given advantages. For example, aquaculture in Hawaii, security technology in Israel, alternative fuels in the Midwest, and solar power in the Sun Belt. There’s a reason why the best woolen sweaters come from Norway and the best Aloha shirts come from Hawaii. It’s not because people tried to buck the trend.
• Don’t pat yourself on the back too soon. Many regions declare victory because Microsoft, Sun, or Google opened a branch office. These branch offices don’t hurt but don’t kid yourself into thinking that the existence of a branch office means that you are now a tech center. Truly, a region is a tech center when its companies open branch offices elsewhere, not when tax incentives and kowtowing got a company to open up a branch office in it.
• Be patient. There is nothing short-term in these recommendations. I estimate that creating something that begins to look like Silicon Valley is at least a twenty-year process. This is certainly longer than most politician’s reign–hence the challenge of doing the right things for the long run.

The short answer is that the government should not do much except provide more funding to the engineering schools. Unfortunately, that probably won’t seem like enough to most people.

• Don’t focus on “creating jobs.” When a region adds the second bottom line of creating jobs, things get whacky. Such a goal perverts the objective of a startup because the primary, perhaps the sole, goal of a startup is to kick ass. If it also has to create jobs for the sake of creating jobs, then you defocus it. The thinking should be: “If this company kicks ass, then it will survive and grow. If it survives and grows then it will create jobs.” So let startups focus on kicking ass and the jobs will come naturally-or not.
• Don’t pass a special tax exemption. There’s an assumption that tax benefits for investing in startups encourages entrepreneurship. I disagree; I think it mostly creates sloppy decisions by unsophisticated investors and crooked ones by others. Indeed, the unstated (and perhaps unrealized) goal of a sophisticated investor is to create, not avoid, tax liabilities. Nothing would make me happier than having to pay $100 million in income taxes. I would hand deliver that income tax return to the White House.
• Don’t create a venture capital fund. The thinking here is that a government created venture capital fund would kickstart entrepreneurship because of the influx of money. However, if there’s one thing you can depend on in venture capitalists, it’s greed. If you show them good engineers with good ideas for good companies, they will appear by (private) plane, canoe, dogsled, and camel. Such a region doesn’t need to create a fund. A supply of capital does not create demand from entrepreneurs–at least not the kind of entrepreneurs that you want.(There is one notable exception to this: the government of Israel created a seed fund that launched its venture capital industry. However, my interpretation is that the fund was successful because there were already entrepreneurs there; the fund didn’t cause entrepreneurs to suddenly appear out of the desert.)
• Don’t provide cheap office space and infrastructure. The rationale is that if entrepreneurs had office space, photocopying machines, T1 lines, and adult supervision, they would be successful. I can’t think of a case where cheap space, incubation, whatever caused success. This isn’t to say that there haven’t been successful companies from incubators (eBay is arguably one), but the key point is to determine the actual causes of success. Cheap space, etc, can’t hurt, but I’d buy engineering professors, not crappy buildings. Just because there’s a cheap building doesn’t mean you should create an incubator out of it.

There’s one more thing you need to do: Aim higher than merely trying to re-create Silicon Valley. You should try to kick our butt instead. That’s true entrepreneurship.

Acknowledgement: Thanks to Glenn Kelman of Redfin for a huge contribution to this posting.

Read more: “How to Change the World: How to Kick Silicon Valley’s Butt” - http://blog.guykawasaki.com/2006/06/how_to_kick_sil.html#ixzz06fOme5OA

A few recent updates on Angel and VC investing for entrepreneurs, and a note from President Obama.

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1. Venture Capital Fundraising Drops

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Venture capital fundraising activity dropped significantly in Q4, according to a report released Monday by Thomson Reuters and the National Venture Capital Association (NVCA). The report, which tracks the fundraising activity of venture capital firms, found that there was $3.4 billion in forty-three venture capital funds raised in Q4 of 2008, down from $8.4 billion in the prior quarter, and down significantly from the $11.7 billion raised in Q4 of 2007. The NVCA’s Mark Heesen speculated in a statement that fundraising activity dropped because of market uncertainty, and because many venture capital firms have raised money in the last two years and are deploying those funds.

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2. Insights and Opinions: 2009 Angel Predictions, Frank Peters

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Frank Peters runs his podcasts at the Frank Peters Show, and is past chairman of the Tech Coast Angels. He recently spoke to angels Bill Payne, Dave Berkus, and John Filla about their predictions for 2009:

Since it’s a new year it’s time to brush up on terms. For example, pay-to-play rounds, never popular, some say angels will see lots of these terms brought to the table by VCs. What are pay-to-play terms and why do they become popular when times get tight, like now? What’s worse than P2P?

We cheerily describe the dreaded down-round and onerous liquidation preferences. And are we doing ourselves a disservice when we do flat rounds? Oh, what a year this could be!

http://www.socaltech.com/articles/2009_angel_predictions/a-00056.html

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3. Publisher’s Blog: President Barack Obama’s Call To Entrepreneurs:

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In President Barack Obama’s inauguration speech, one passage jumped out at me as speaking particularly to entrepreneurs (italics mine) (More) http://blog.socaltech.com/2009/01/21/president-barack-obamas-call-to-entrepreneurs/

“In reaffirming the greatness of our nation, we understand that greatness is never a given. It must be earned. Our journey has never been one of shortcuts or settling for less. It has not been the path for the faint-hearted — for those who prefer leisure over work, or seek only the pleasures of riches and fame. Rather, it has been the risk-takers, the doers, the makers of things — some celebrated but more often men and women obscure in their labor, who have carried us up the long, rugged path towards prosperity and freedom.”

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As I always like to say, invest in the entrepreneurs with the innovative ideas that create the companies that create the jobs that create the wealth that creates what America is all about.

Since my original post suggesting solutions to the ongoing nationwide mortgage crisis, I thought I’d provide a few updates and also another new (and what I believe to be critically important) suggestion for the use of TARP funds to stimulate the U.S. economy.

First, the mortgage crisis updates.  While all housing, real estate and financial data remains horrendous, there are rumors floating around that the federal government may, in fact, be considering a version of one of my previous suggestions.  Namely, in addition to the recent Treasury announcement to purchase up to $500 billion worth of Fannie Mae and Freddie Mac mortgage paper, the feds are now contemplating a blanket move to drive 30 year fixed mortgage rates to 4.5%. 

This, to me, is a *great* idea and is even better than the 5% rate that I had originally proposed.  While nothing is going to solve the mortgage crisis overnight, federal intervention to get mortgage rates down to a level that provides sound refinancing options for existing homeowners and great initial financing options for new homeowners will make a material difference from coast to coast.  Additionally, this approach would remove the moral hazard of only rewarding those individuals that were irresponsible in setting up their original loans and/or biting off more economically than they could legitimately afford.

You may ask yourself, why was 4.5% the magic number selected by Treasury?  I don’t claim to know the specific answer to this, but I think that I can reasonable come up with the math that would have allowed them to arrive at this number.  Namely, if 3 month LIBOR rates are at roughly 2.20%, and if the 10 year historic spread between LIBOR and mortgage rates is roughly 1.68%, then that would put 30 year fixed mortgage rates at about 3.88%, or 2.20% + 1.68%.  Right now the historic spread is far higher than the underlying 10 year average of 1.68%, so the difference between the historic average and today’s reality is probably closer to 0.62% (or 62 basis points) higher.  As a result, 1.68% + 0.62% equals 2.30% … and thus 2.20% + 2.30% equals our magic 4.5% mortgage rate number.  Simple enough? 

Now, let’s move on the second topic regarding new economic stimulus.  This one is much more straight forward and is one that embraces the creators of new businesses and new jobs: entrepreneurs.  As a serial entrepreneur myself, I have always believed that entrepreneurs come up with ideas that create new companies.  These new companies, in turn, create new jobs, which then create wealth that then gets consumed, reinvested or saved.  However, independent of which item of these is ultimately selected, the process stimulates economic activity and growth and the overall aggregate U.S. economy benefits immensely.

So, what’s my plan?  My plan is to take $4 billion from the TARP program and split it in to 20 batches of $200 million.  What we will do is transfer $200 million to each of 20 cities to be used exclusively for investment in early stage companies.  15 cities will be selected based on their ties to start-up building and would include cities already known for their ability to successfully create Internet, technology, biotechnology, software, hardware, financial and health care companies, with the remaining 5 cities being selected based on their severe economic challenges alone.  For the 15 cities, my chosen list includes, Seattle, San Diego, Los Angeles, Denver, Phoenix, Austin, Dallas-Ft.Worth, Atlanta, Raleigh-Durham, Richmond, Boston, Chicago, New York, Miami and the Bay Area (which I will treat as one city composed of San Francisco, San Jose and Oakland).  For the 5 cities, my chosen list includes New Orleans, Detroit, Minneapolis-St. Paul, Nashville and Cleveland.

Now that we have the money and the initial cities identified, we will have fund managers with start-up, venture capital and/or private equity experience locally selected to deploy the investment dollars.  Then, we will have local companies, either newly created or in “early stage” mode, be showered with $500 thousand to $1 million investments each on behalf of the U.S. Treasury and the American taxpayer.  These investments will be in the form of equity and will provide for roughly 300 investments in local start-up companies to the cities selected before all of the $200 million fund money is expended in each local market.  And, if you’ll allow me to use experience as my guide, I will posit that for a material percentage of these companies invested in by the American taxpayer, others will provide matching or follow on private investment in the form of high net worth individuals, Angel funds, venture funds, private equity funds and/or corporate strategic funds.

So what does this do?  This direct stimulus addresses the heart of the problem accompanying the current ongoing crisis relative to unemployment and job creation.  I will be the first to admit that some of these investments will ultimately not pay off at all, and also that many of these companies underlying the investments will not survive.  However, for the U.S. taxpayer to make a good return on their investment, all we will need is a handful of successes in each individual market, or a few major successes anywhere throughout the country.  That’s all.  Simple, easy, straight forward and the best economic stimulus in the world … empowering ideas to spawn creativity to solve real problems to create real businesses to create real jobs that create real wealth to create real returns in spades.

Doubt that this is possible?  I sure don’t.  Way back in the late 1990s, Ron Conway, Casey McGlynn and Bob Bozeman took this exact approach in managing a $100 million Angel fund in the Bay Area called SV Angels LP (SV = Silicon Valley).  Ultimately they invested roughly $300 thousand per start-up company in a shot gun type of approach and as a result, were able to cover about 300 companies with the money raised.  Some of these investments, such as GirlGeeks.com and others, turned out to be spectacular failures during the Internet bubble and lost every penny invested in them.  However, some of their other start-ups turned out to have had liquidity events that ranged from modest wins to enormous successes.  These included companies like the one that I ran called Vovida Networks that was purchased by Cisco Systems for more than $100 million, and other companies that many of you would know well … from Napster to Plaxo to Google.  That’s right, Google, which as I understand it delivered more money back to the fund than the entire $100 million invested all by itself.

I know, I know, you’re saying that this is an unusual example that can’t be repeated again.  From my perspective I would suggest that not only are you wrong in this conclusion based on history, but also that even if you were right, this $4 billion in TARP money would have exponentially more valuable benefits to the entrepreneurs, companies, employees, governments and communities in which the money was put to work than the tens of billions of dollars already deployed through TARP to banks that are not putting virtually any of that money to work for the businesses and consumers that need it right now.

More specifically, out of a $700 billion TARP program, $4 billion put to work in this way wouldn’t even represent 0.6% of the entire TARP program.  Think about that.  Are you willing to invest up to 1% of TARP in a program like this across the country, or throw another $50 billion at Citigroup or AIG?  Exactly.  And, if anyone is upset about my choice of cities, let’s increase this commitment from $4 billion to $7 billion, take the full 1 percent of TARP as suggested and add another $200 million fund in each of another 15 cities across the country.

Trust me.  There would be no greater use of money than this modest investment in the great ideas of entrepreneurs to create the next wave of great American companies.  Period.  And, the return on investment to the American taxpayer will go way, way beyond the ultimate end state value of the equity purchased through all of these deals.

Mr. Obama, Mr. Paulson, Anyone in Government that Can Make Things Happen - please contact me and I would be happy to serve our country as the National Director for this program!

I am a serial entrepreneur and a founder of many businesses.  I am also an individual and fund investor that enjoys aggressive growth, start-ups and ideas that can either revolutionize an existing industry or launch a new one entirely.  Lately, however, I have been downright amazed to see the hubris and foolishness driving corporate decision making by founders with regards to mergers, acquisitions, valuations and exit opportunities.

Call me crazy, but I believe that any founder running any business that has taken outside money from anyone is nothing more than a steward of that business and has to focus their decision making and fiduciary responsibility with one simple goal in mind.  Namely, how do they take third party money to grow their business and create value and then monetize that investment in a reasonable timeframe in order to deliver returns to those investors.  By following this simple goal, it is likely that founders, employees, advisors, directors and investors will all benefit greatly and that the interests of all stakeholders will be in alignment with one another.

Don’t get me wrong here on my point.  I believe immensely in the vision, ambition and aggressive drive (or craziness) necessary for founders to be able to take an idea and turn it in to a great company (or any kind of company for that matter).  Without some of these underlying personality quirks and eccentricities, it is likely that a great idea would go absolutely nowhere at all.  However, when taking a look at the behavior of the founders running Facebook, Yahoo (NASDAQ: YHOO) and Sandisk (NASDAQ: SNDK), one has to wonder aloud what in the world is going through these individuals minds and why nobody on their boards or in their investor bases are intervening in a major, major way.

After News Corporation (NYSE: NWS) bought MySpace and then increased its value almost ten fold from its exit price, I could respect some of the preliminary decisions at Facebook to say “no thanks” to acquisition offers that underpriced the value that had already been created.  Heck, on my first business with my business partner we too said “no thanks” to Polycom (NASDAQ: PLCM), Terayon (NASDAQ: TERN) and others before finally saying “yes” later on to Cisco Systems (NASDAQ: CSCO).  But, when a Microsoft (NASDAQ: MSFT) comes along and offers $10B - $15B in cash for your business and allows an immediate path for outrageous monetization and returns for all parties involved in a reasonable timeframe and without any operational risk whatsoever, you just have to *run* to sign the definitive agreement on behalf of your stakeholders, say “thank you” and move on.  Put a checkmark in the “W” column, put the money in the bank, change lives economically forever for those involved and then, if you want to, go out and do it all over again as Steve Jobs, Jim Clark and Marc Andressen have done before you.  

With regards to Facebook specifically, fast forward to today and what do you find?  You find a company that is starting to look like it is running the near term risk of completely missing out on what might have been possible with a Microsoft acquisition, both certainty of outcome and massive economic returns.  True, Facebook has grown immensely over the past year and Tech Crunch did a fantastic job on October 31st summarizing this growth in terms of user growth increasing from 74M to 161M uniquie monthly visitors and web activity increasing from 35B to 61B page views overall.  After all, 118% and 74% year over year growth on such metrics are amazing and to be commended.  Unfortunately, though, the cost of that growth has been equally off the charts and now Facebook appears to need to raise significant additional capital in what can only be described as a horrendous capital raising environment as a backdrop.

Even though Microsoft ponied up a quarter of a billion dollar investment not too long ago at a nosebleed $15B valuation, it appears that Facebook is out talking to sovereign wealth funds in Dubai and elsewhere in the Middle East as no VCs or private equity firms appear interested in investing at the valuation desired by the company.  Uh oh.  Meanwhile, online advertising is being curtailed by companies large and small alike, only 1 in 4 new Facebook users are from here in the United States and international user add ons are growing despite these additions having little to no associated revenues and much, much higher bandwidth and access costs.  As a result, it sure looks like the $10B - $15B offered by Microsoft would have been a much, much better outcome than the operational risk now accompaying the future of Facebook from this point (Pointcast anyone?).

In parallel to this drama we have seen equally poor decision making coming out of both Yahoo and SanDisk as well.  Founders gone wild in both instances for sure.  Exhibit one is Yahoo and Jerry Yang’s similar refusal to a Microsoft offer that would have likely ended up in the mid $30s, and a premium to market of something around 100%.  On top of this immense economic benefit to investors and Yang alike, all Yahoo employees would have been retained by Microsoft and given quite lavish retention packages to ensure that they didn’t walk out of the door at closing.  Instead of saying “yes”, however, Yang decided that going it alone would be a much better path forward and this decision led not only to a Yahoo share price below even where it was pre-Microsoft offer (today around $12.70 per share), but also thousands of terminated Yahoo employees that otherwise would have all been retained with “in the money” stock options and compensation packages that would have preserved all of their past work and guaranteed their future work as well.  Great, great decision on that one Jerry.

Exhibit two is SanDisk, and very similar to the path taken by Yahoo, Founder Eli Harari did an absolutely fantastic job spurning Samsung’s $26 per share all cash offer while it was trading at basically half of that value.  Dr. Harari, despite currently owning less than 5% of SanDisk’s outstanding shares, made the “compelling case” that the memory industry was undergoing a cyclical down turn and that the Samsung offer was a low ball attempt to get a great asset in SanDisk at a market valuation not reflective of its true underlying intrinsic value.  Really?  Seriously?  You want shareholders to believe that somehow $26 in cash right now is less than $13 per share in stock value (which is now less than $10 per share as of this writing)?  And you want others to believe that the operational risk associated with the NAND memory market and future cash flows possible from the next upturn for SanDisk will more than offset the time value of money associated with the deal on the table right now in this market environment?

All of these examples are frighteningly similar in the ”founder foolishness” accompanying the decisions being made at the top of what are very much brand name and well known companies.  Founder CEOs should not and are not entitled to treat their businesses like “personal piggy banks” when they have taken outside money.  However, in all of these examples, similar founder behavior is being displayed and it is drastically and materially affecting each and every non-founder associated with all of them negatively.

The punchline for today is simple.  Be a founder.  Have a great idea.  Start a company.  Execute your vision.  However, while doing so stop forgetting about what your real job is.  If you want to do whatever you want, then stay private and don’t take any money from anyone.  However, if you elect to raise money or operate publicly, then realize that you are no longer what the company is all about.  You are simply there to be a steward on behalf of others.  In the cases of Facebook, Yahoo and SanDisk, it would be well served for all of their founders to collectively pull their heads out and understand this, immediately.