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I attended a panel last night nominally on the topic of whether the local startup ecosystem was best seen as the M&A feeding grounds of big west coast technology companies. Because it was an interesting group of panelists, we wandered a bit and never really dug into the core question of whether this is true and what its implications might be for the overall technology industry in Cambridge and Boston. Having been Twitter taunted by Scott Kirsner to come prepared for a fight, I was disappointed we mostly avoided the topic.

The short answer is that while we do indeed have plenty of liquidity events tied around large technology companies from the west coast as acquirers, we could use more to ensure an even healthier ecosystem and that as such I think we should be thrilled to have more companies exit to the big tech companies of out west, not stressed. While there is one nuance about what we are missing today (particularly when it comes to web companies), overall this is a good thing.

First, my take on the necessary virtuous cycle of the startup ecosystem:

It starts with "founder material," the engine of the entire machine. As a general rule, New England has always done well in producing founders but a macro trend which has helped us disproportionately in the last five years has been the plummeting age of the typical founder, a factor which plays very well in a university-rich geography. Whereas the 1980s saw the median founder coming out of a minicomputer company on the 128 riviera, today that founder is just as likely to be 22 and fresh out of MIT, Harvard or any of the sixty odd colleges and universities in Massachusetts alone.

To get the engine started, most founders need a little fuel in the form of a few hundred thousand dollars, something which until this latest boom in seed activity was a weakness of our region, or more likely, a unique strength of Silicon Valley. Back in 2001 when the venture dollars dried up, the only place one could get money at this scale in Boston ($100-1000K) was from one of a few rather onerous angel groups. However, using the new StartupDataTrends (a very cool new tool I highly recommend you try out for what it achieves in terms of startup funding transparency), you can see the differences in average seed round amount raised and valuations below:

Location Avg. Amount Raised Avg. Valuation
Cambridge $981K $2,868K
Silicon Valley $854K $3,363K

Once the engine has started, the startups that find product/market fit then often go on to need scaling capital, the job of traditional early stage investors and a segment where New England has been over represented on a per capita basis for a long time, so we certainly have no problems there. Entrepreneurs may argue that VCs are too conservative or don't get the Internet but it's hard to argue that there are too few of us, and more importantly, not enough dollars in this geography.

Where we have suffered a bit, especially in this latest wave of Internet companies has been in finding "scaling employees," or the folks that, trained at large companies in a similar sector, can quickly ramp a few hundred thousand dollars of run rate revenue or unique visitors into millions and tens of millions. In the 1990s we didn't have this problem because everyone was new to the web and we were all making it up as we went but over the last 10 years there has been a legion of middle managers that have gone from Yahoo to eBay to Google to Facebook (and a few other relevant chains) and learned how to skillfully scale engineering, sales, marketing, operations, etc. for ever larger web businesses. My mental image of this is a set of Russian dolls surrounding the same core group of management talent with each subsequent generation of a "pole tech company" being more massive at scale than the former (e.g. Yahoo->Google->Facebook).

While we've got some of those folks here (hidden away at companies like TripAdvisor, VistaPrint and Kayak), the density is too low for all of the interesting startups that need this type of talent. This is the one place where not having the big pole companies in the web (unlike say systems companies in networking and storage which we've got plenty of) has hurt us. Though again, time and success should fix this.

Finally, a lot of liquidity is necessary to recycle founders (who will swing harder the next time), create new sources of startup capital, and most importantly, provide a way for startups that won't ever be able to turn into billion dollar standalone companies to find a home, thereby releasing raw materials back to start the cycle.

This last point on too much "selling out" was meant to be at the core of last night's panel and my core argument was going to be that we need more not less of it and that by having companies like Google, Microsoft, VMWare, and Amazon, establish meaningful presences (not just sales offices) in Cambridge, we were likely to see more of this type of activity.

I believe Scott Savitz said it best last night when he talked about the key metric being the number of "at bats" that we get as a region to create monster companies here. No matter how you think of it, accelerating this startup ecosystem virtuous cycle— be it in e-commerce, mobile adtech, infrastructure software, robotics, ed tech, or any other of our emerging tech clusters— can only help that particular statistic.

Postscript: In a related sign of the virtuous cycle being accelerated, Brad had a very nice piece after his visit here this week on entrepreneurial density that is worth reading.

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Try as I might to find objective data in their financials to show the slowing of the platform, I found it difficult to observe any cracks in the iOS money-making machine. Apple is continuing to spend fewer dollars as a percentage of revenue on both marketing and engineering (the easy way to tell at a macro level that an at-scale tech franchise is sucking wind), and their integrated approach continues to win the hearts and minds of the US consumer thus keeping legions of developers working first on iOS and later on Android.

Still, it cannot be a healthy thing that the bulk of the economics are going to Apple, and not just two-thirds of the profits in the handset market but most of the ecosystem rents in the app ecosystem, music business, smartphone carrier business and whatever other industry segments they chose to enter. The fact that this may in several cases be a direct wealth transfer from X industry to gross margin dollars on iOS devices that have the same components as their Android cousins (and are in some cases made on the same lines) does not make it less healthy.

This simply cannot last. And this mind-blowing chart from Asymco tells the story of why:


(Go and read the post— and then come back to get a fantastic historical context to the waves of the personal computing industry)

It is astounding to see how quickly the smartphone has dominated all other individual computing platforms. While there are obvious reasons (truly portable computers that are always with you, ubiquitous access to the Internet, carrier subsidies), the key point is that on top of being far bigger, far faster, the forces at play in mobile (economic, technical and social) make it the single most dynamic multi-billion dollar industry in the world. Yesterday's king is today's pauper with just the smallest series of missteps.

Since those steps can't be observed from macro metrics, I thought it might be interesting to paint a picture of why the incremental developer on the platform might be losing steam with the promise of becoming an "AppStore Rock Star." After all, if Microsoft has taught the world anything over the last decade, it is that losing the hearts and minds of developers can seriously arrest the momentum of any platform, network effects be damned. While there are plenty of iOS developer surveys out there, they are hard to parse for perceived changes of momentum (though not for sampling bias in most cases) so instead, I'll focus on three reasons why we might be on the cusp of a change in the tide here:

First, while there are more iOS developers building better looking apps and standing a better chance of making money from the AppStore than other smartphone marketplaces, the reality is that app prices continue to plummet making it increasingly hard for the small team/solo cottage industry that gave us some of the AppStore's early hits to continue making a living (to say nothing of the increasing complaints I hear from developers about the opaqueness of the approval/update process). Put another way, there is now much more money going through the AppStore than is being generated because of the AppStore.

Here is a crude example in just one of many of the "through" verticals: last year Apple paid roughly $2.5-3 billion to all AppStore developers worldwide. At the same time if we take a 1% estimate of e-commerce sales that went through apps in the AppStore (haircutting the mobile 10% of ~$680 worldwide 2011 e-commerce sales by 20% for iOS and a further 50% for non mobile web) is still around $7B which at 30% gross margins is right around current developer revenue. And this is just one of the many verticals that monetizes well through the AppStore whereas the $2.5B includes games (a huge part of revenues) and in-app payments for content. Not only are the economics of app purchase not compelling (and heading in the wrong direction), but the broader platform point is that none of this money exists because of something unique to the iOS ecosystem. It could just as easily move to Android despite the latter's lower "because of" current monetization ability through the sheer power of market share.

While Apple has done a brilliant job of defending its own ecosystem through the half million bits of effort (apps) from independent developers, it has not, unlike the Microsoft of the 1990s, managed to create a thriving ISV community dependent on iOS for revenue in the way that Windows developers made their livelihood— and in some cases very large companies— on the back of Win32. Where is the Lotus of the AppStore? Thus far, Rovio (Angry Birds) comes the closest, and even they have quickly diversified to a plethora of platforms despite being in the lucrative gaming app vertical.

Second, while there is no question in my mind that the iOS toolchain is far superior to the kludge that is Android's (which is now also encumbered by increasing fragmentation (both vendor and version wise) and Uncle Oracle's ownership of the underlying language), fancy development environments and better UI toolkits don't keep developers around for the long term (see again: 1990s Win32 development), but platform ubiquity does— especially in a making money "through" era where virality is your new marketing, and more than 1/2 the market is only accessible on either Android or the mobile web. Think of viral loops and how quickly they can die when 50% of the invites fail to land on an iOS device.

Finally, there is the straight jacket that is the controlled experience of iOS, most commonly felt today in the way Apple implemented background processing on its platform. The arguments for this poor man's multi-tasking have been battery and CPU constraints but as both have improved (with the iPhone 4 and 4S) they appear less relevant. In the meanwhile interesting apps need better control over what can happen in the background (think of what comes after the "check in" for location-based social networks or almost all communications apps now being funneled through the unintuitive Notification Center). The iOS devices are now at the point where they are quite powerful computers— and the most relevant computers in people's lives— so continuing to maintain a small sandbox for third parties to exploit the possibilities will only increasingly make alternative platforms attractive. Put in a much geekier way: the smartphone is today's tricorder and in order for developers to make it that, the first place they need more control is in what happens in the background. Android gets you that today and Apple would be wise to follow.

One final point related to why developer momentum may lag in the coming years: in 2007 when Steve Jobs launched the original iPhone, he claimed that it was "five years ahead of the rest of the market," which, as it turns out, seems to have been remarkably accurate. The market has now caught up though, and outside of incremental upgrades (higher density display, faster multicore processors, etc.), Apple has given us only two "next generation" pieces of functionality: iCloud which, while promising, is far from ready for prime time; and Siri, a fundamentally transformative interface step forward— something which Apple itself is quite good at— but works far too poorly to become mainstream today. In both cases, a robust API for third parties could enable the hundreds of thousands of independent developers who got the iPhone where it is today to help iOS continue to cement its leadership position. It would be messy, and there would be ugly moments, and it would quite likely be an un-Apple move to make. Without it though, the platform may have nowhere to go but down from here.

[Ed note: before people start pointing out how much money Apple is making and how successful it is— I agree. I am looking for signs that this may end here and to that end, this is a speculative piece]

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I used to think that, as with Linux and web services in the early part of last decade, Android was going to be the mortar for the Internet of post PC devices— an essential ingredient to put stuff together. And as bonus, unlike Linux which puttered away quietly in the background doing the heavy lifting for services like Amazon and Google, Android was largely user-facing and would also therefore benefit from massive platform scale (and the resulting de-facto standard it would create) the way no piece of software since Microsoft Windows had. To to see the early onslaught of CES announcements, one would think so.

What all of the talk of Android momentum and inevitability obscures though is that the dream of a common Android that developers can write/deploy apps to and users can become familiar with is burning. More specifically, three events in 2011 burned it and we're now holding on to a charred corpse that is quite different: an Android so splintered that it will make the glass on your Galaxy Nexus S2 Prime Pie dropped on concrete look like an ice skating rink.

The three events: 1. Google buying Motorola and alienating all of the tier one handset makers (none of which to this day have the spine to state it publicly but all of which have now come up with their "plan B"), 2. Microsoft extracting licensing fees from these same handset makers in the form of IP indemnification and 3. Amazon shipping a wildly successful, yet unidentifiable, version of an old Android build over the holiday... and making it a wild success. Of the the three, #1 was completely avoidable but the other two may just have been the name of the game when there is so much at stake in the fight of who paints the interface for the next generation of computing.

The result of this elephant dance? Well it depends on who you are:

Web heads: All of the HTML5 folks should be ecstatic as it means that despite the laggy performance of mobile Webkit based "applications," we are going to see a resurgence in startups who target the emerging Android splinters with interfaces which leave the heavy lifting on the deployment side to the the web (see the bit about how the Kindle Fire blocked the Google Market and vice versa for why) and on the runtime side to the mobile browser. It won't be as nice and in the short-term and it will lack access to key device sensors (though it may accelerate our getting those as API extensions of the DOM) but it is just not feasible to support iOS, Googlorola Android, HTC Sensedroid, Amazon Fire Droid, etc. if you are a startup. Big win for this emerging standard.

Users: Remember the olden days when the carriers were in charge and you got whatever they were serving for dinner? Well we aren't ever going back to that but I can't help remember a conversation I had with the head of product for a US carrier last year at Mobile World Congress where he told me that their ideal world was "5-10 platforms with 10-20% each." Why? Because in that mess someone has to help the user figure it all out and they are back to being in a pole position. I'm not sure they'll pull it off but device OS fragmentation definitely gives them another at-bat and if there is one thing these guys have proven it is that preloads work magic to overcome totally busted user experiences.

Let's not forget of course that as users you'll have to deal with the aforementioned jankiness of HTML5 applications for a few revs. Trust me though, short-term pain, long-term benefit.*

Entrepreneurs: last year my advice was, build iOS and mobile web app and wait until you've got a million downloads before targeting Android. I see almost no one pursuing that approach these days, so I'll revise it a little: build an iOS app and a mobile web app and then go hunting for dollars/help to develop for the splinters of Android, opting to build yourself only the most generic bits of app code that you will for sure be able to reuse. If you want to get on a market where no one will pay you either in $s or in in-kind promotion, go super lean and build all of your interface in Mobile Webkit (through something like Phonegap) until you've got a feel for whether the particular splinter presents a juicy vein of user adoption.

It not a particularly well-kept secret that when WebOS was in its death spiral, HP would happily pay developers to port any application which had shown traction to their platform. To my knowledge the Android tier one handset guys have not done this yet, but given a little time it may become a reality. There will still be all sorts of headaches involved, and you might be better off taking the love from Microsoft, but in a world of several warring Androids, you are the scarce commodity. Though the more popular splinters such as Amazon's will likely never have to pay for developers, especially given the fact that with only one Christmas under their belt, they are already outperforming the standard Google Market in terms of downloads for some app categories, the rest will, probably in inverse proportion to how valuable they will be to getting you users. And in the meanwhile consider them non-dilutive equity financing sources.

It's going to be a really interesting year for mobile. Having tackled Android, I'll do my thoughts on iOS next (and it's not coming out all roses there either).

*
Finally, one last comment on the promise of Android to be the "people's operating system—" helping to bring general purpose computers to those who couldn't afford it otherwise. I think this is a noble and incredibly worthwhile goal. However, in the face of all of the IP issues that are facing and will continue to face the Android splinters, I am not sure the cycles are not better spent supporting some of the emerging Ubuntu efforts around mobile phones and tablets. While they too may be unable to escape the aggressive IP volleys of a monster industry afraid for its survival, and while there are tons of usability issues to solve, it is a viable option, especially if Shuttleworth ships his tabletized version of the OS.

Some interesting links for background reading:

Trouble with Android - on the pain of supporting screen size OS version differences.
Android is Clopen - brilliant piece on how Android is more closed than open.
Slowing Android Shipments - The Asymco magic on the platform's growth

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The Amazon Kindle sucks plain and simple. I say this despite loving almost everything that Amazon does and thinking that Jeff Bezos is the closest contender for the post Steve Jobs "best tech CEO." And the excuse that it great for people who can't afford an iPad reminds of the wackos who argue that Linux on the desktop is good for the developing world as though being poor helps one overlook crappy product.

Professional reviewers have said it better but here is the laundry list of blemishes: it's industrial design is at best uninspired and more likely flawed (no buttons on the device, an easy to depress overloaded button on the bottom), it's build quality is atrocious (my unit squeaks like Tweetie bird and it feels cheap), and most importantly, the software build shows its underpowered Android roots in everything from the sluggish page swipes to wanky and discordant visual effects or periodic freezes that make one wonder why they didn't just port the diminutive eInk interface to this dog of a slab.

Overall, the 2011 Android Amazon tablet is not much better than the 2008 HP Android tablet that we worked on— and that was built on older silicon and with little of the right software expertise. How Amazon expects this to sell well is beyond me. I'd definitely not recommend it to anyone— not even someone looking for a cheaper iPad— not just because it is bad but because it is a product that gets hired to solve no problem and does it poorly. The iPad face a similar challenge but fortunately for Apple proved to be so good at what it did (surf, email, content) that people were delighted to use it as their portal to these applications.

The lesson is clear: if you are going to invent a category not fundamentally rooted in a basic need, you need to overdeliver not provide the budget low entrant disruptor. Go big or go home. Amazon did this with the first 3G seamless e-reader back in 2008 so it's shocking to see them missing the mark now.

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Bye bye Steve

We are all going to miss him a ton. A zillion pieces have been written about it. For days I've been struggling with whether I'd add to the mush by writing any of the three stories from my meetings with him— each funny and poignant in its own way. But in the end, I think I'll stick to a couple of pointers from the torrent of stuff I've been inhaling over the last few days.

If you are feeling kicked in the stomach like me and don't quite get why, go watch Jon Stewart's Moment of Zen on Steve's passing— he nails why you feel out of sorts with the alien metaphor.

If you want a personal view, go read Walt's piece. The journalist who Steve cared about the most, Walt nailed the essence of Steve— and the walk to the park bit shows you why our best heroes are just as human as the rest of us.

And finally, if you want to be humbled a bit this weekend, watch the video below from the 1997 closing WWDC fireside chat. Remember that this was a time when Apple was the laughing stock of the tech industry— when even Michael Dell could shit on them. And then listen closely to how honestly Steve communicates what the company needs to do. He lays out the next 14 years with remarkable detail, stated plainly and without futuristic marketing bullshit. Listen to him talk about living the cloud+mobile future at NEXT and wanting to bring that to the Apple customer base, or why dollars spent on TV advertising in 1997 would be wasted to see how clear-eyed he was at the time about what he needed to go and get done.

As many have said, I don't think we'll see another Steve in our lifetime and man do I feel lucky to have been able to live through his leadership of Apple's return to the top.

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