Down the Start-Up Staircase

[Munger]

Re: Down the Start-Up Staircase

First, you can only patent new inventions. So if you are first to invent something, someone else cannot later get a patent and stop you from making/selling.

Second, companies in the U.S. can take advantage of the same competitive advantages as other companies throughout the world. These are usually much better protection than a patent, anyway. Microsoft did not become the world's largest software company because of patents; it became so because of lock-in and network effects. Intel became the dominant chip manufacturer because of lock-in and economies of scale. Same with AT&T, facebook, etc etc.

[Raz]

Re: Down the Start-Up Staircase

Thanks for the article, it puts some good details to the overall feeling that China will soon manufacture all the goods we want and eventually we won't even have the money to afford any from them. I agree with the author on a lot of these points, but that being said I still have a few critical comments.

I don't understand the mindset that the US has a free market. It is partially true and maybe you could say mostly true. Still to me that is like saying a glass of water is poison-free because it only contains 10% poison. The bigger problem in my opinion though is that the problems in our economy are too often blamed on it being mostly free rather than not free enough.

Is the root of the problem that companies are free to outsource to lower costs? Or is the problem that a combination of taxation, regulation, litigation, labor laws and other government interference make it not competitive to manufacture in the US?

Also what will be the end result if we implement these suggestions? US companies will be forced have higher costs than their global competitors. Even if protectionist laws can force US consumers to pay a premium for US made goods, the rest of the world won't.

If he concedes that the free-market is superior to a planned economy, why is his solution to have less freedom and more planning?

Regardless of what is or is not done, I don't think there's any way to "save ourselves" that doesn't involve at least some lowering of expectations/standard of living.

Thank you, DSpencer, for pointing out the problem of demanding higher wages, employer-provided medical insurance, defined benefit pensions, longer paid vacations, and in some places that have the "socialist model" - 4 day work weeks.

Who are the well-heeled saps that are going to put up the capital and sweat bullets while working 60+ hours each week in order to provide these wonderful jobs?

Oh yeah, I forgot: the Gubment'. That will certainly make us competitive.

[MarkL]

Re: Down the Start-Up Staircase

There is a main answer that is missed here. America has already largely made the transition away from low-quality-of-life manufacturing jobs to being knowledge workers. That ship has largely sailed. But we CAN maintain our quality of life by becoming better knowledge workers than the rest of the world. This is how Silicon Valley was born, and why even to this day it's respected worldwide.

Bring BACK dirty, repetitive, highly competitive manufacturing as the answer to American's quality of life standards and economic problems. Not gonna happen. Our environmental laws, OSHA laws, taxing structure, HR benefits and more simply won't let America be competitive in that space. At least not with humans. Maybe with robotics.

The answer that is missing here? Education and retraining. We need to re-invent our educational system for our youth, and re-educate our baby boomers that can't retire (most of 'em) along with everybody in-between that's unemployed for the new millenium, and thus maintain our quality edge in the knowledge workspace. If not, the current wave of knowledge-worker outsourcing will continue and become as unstoppable as manufacturing outsourcing now is. If this happens/continues, The only alternative is a dramatically lowered standard of living.

Oh, and where will the jobs for these knowledge workers come from? Oh yea. Startups. Manufacturing startups that use robotics that are heavily dependent on knowledge workers for design and maintenance? YES. Software startups? YES. Hardware design startups? YES. Nanotech and Biotechnology startups? Damn straight.

The world is moving faster than ever before. Television and landline phones took decades to go global. The internet and Google took 10 years to go worldwide. Facebook has taken 4 years to go worldwide with 500 million users and the next revolution will take 2 years. Being on top of this process is THE place to be!!

America only has a population of 300M people. We CAN become the top knowledge workers of the world... and to some extent already hold that position. We have the startup experience, the Googles, the Facebooks, the Silicon Valley infrastructures across the country and the Venture Capital economic infrastructure to fund this.

But we must cling to this position, now, desperately, by fixing the education infrastructure fast... or the USA will have no place to go and we will economically stumble or fall... and this will preface the failure of most other aspects of our country as well.

[c1ue]

Re: Down the Start-Up Staircase

America only has a population of 300M people. We CAN become the top knowledge workers of the world... and to some extent already hold that position. We have the startup experience, the Googles, the Facebooks, the Silicon Valley infrastructures across the country and the Venture Capital economic infrastructure to fund this.

But we must cling to this position, now, desperately, by fixing the education infrastructure fast... or the USA will have no place to go and we will economically stumble or fall... and this will preface the failure of most other aspects of our country as well.

Mark,

I respectfully disagree.

The reasoning is long and best illustrated by an example:

I left the semiconductor industry in 2006. I did so because I saw a black wall in the near future, and as a mid-level technical marketing/consulting/consulting sales/IP guy - there was not going to be a future for me in an industry that was unquestionably going to be shrinking continuously for the next several decades.

Why did I conclude this? The semiconductor industry is based on technology progress - best exemplified by the minimum size object that can be formed.

In 2000 it was 180 nanometers; by 2006 it was 65 nanometers and today it is 32 nanometers.

But beyond the generation age issue - prior to 65 nm, a new generation would arrive every 2 to 3 years which is now 5 to 7 years, a new generation being equivalent to spring for the industry - the economics of semiconductors has changed.

A company with $500K could realistically expect to bring to market a functional product at 0.18 um when prototype costs were in the $50K range.

However, at 65nm a company needs $150M to do the same thing.

Getting $150M together on a speculative venture is extremely difficult - even if it is done it means that there will be 95% fewer startups due to the difficulty of raising cash. Fewer startups = less innovation. Less innovation+Fewer startups = less variety by which suppliers can survive. Fewer suppliers and startups means more relative power to the surviving oligarch companies of the semiconductor world.

The problem in the US is identical: the basic costs are too high. Between housing, taxes, health care, and a series of other issues, it simply costs too much for labor to be competitive NO MATTER if it is knowledge based or not. As we speak, hardware design and software are migrating abroad.

While no one expects costs to be similar to China, the German example shows clearly that controlling FIRE and health care does allow enough space for both jobs AND a successful economy.

Put another way: for the programmer(s) I need for my present work, I was willing to pay $75 to $125/hour on a consulting basis.

But no one even remotely qualified was willing to do so without both large chunks of equity AND a salary.

I can understand this - why not hold out for more when $200K/year consulting barely qualifies as middle class in the Bay Area.

But the result is my team is split evenly between Russia and India.

Andy Grove's paradigm held valid for my case certainly, and holds true for my ex-industry as well.

[MarkL]

Re: Down the Start-Up Staircase

You said you disagree... but I said a lot and you didn't say WHAT you were disagreeing with.

And... I agree with all of your points.

I agree "it simply costs too much for labor to be competitive NO MATTER if it is knowledge based or not" and that "as we speak software and hardware design is migrating abroad." (I own a company that does this). I also agree that "the German example shows clearly that controlling FIRE and health care does allow enough space for both jobs AND a successful economy." Clearly this is a necessary component of a USA solution.

However, my point is that spawning a bunch of manufacturing jobs in the USA as Andy Grove seemed to propose isn't the answer. All that will do is generate a larger poor class and more environmental problems. Stemming the flow of Knowledge based jobs from leaving our shores is the best thing we can do... albeit NOT an easy task!

So are you disagreeing that saving Knowledge jobs is the answer? Are you proposing mfg jobs IS the answer? If you don't think either one can be saved in the USA, are you proposing we just roll over?

What are you disagreeing with and proposing precisely?

[MarkL]

Re: Down the Start-Up Staircase

Also, I agree with your semiconductor move. It was a smart one. But with the emulators, ability to use older technology for early stage prototypes, MEMS and the ability to outsource your fabrication during the early stages of development, there are startups getting funded. In fact, the GSA reports that in the first six months of 2010, 78 semiconductor funding deals were valued at approximately $800 million, a respectable 42% increase over the same period in 2009. So semi's not dead yet!

I look at the funding problem you describe as being similar to trying to start a car company. You're right... innovation will largely evolve to be the domain of the semiconductor companies, and the occasional Delorean or Tesla.

But exactly the opposite is happening in software. These days a few college kids, a case of beer, and a laptop can start the next 500 Million user revolution. In addition with virtualization, development tools in the cloud, and the increased ease of use of many of these tools, development really is moving into the hands of almost anybody.

So... yet again I think we agree on the facts. What's the conclusion? Startups in semicon are going to be rarer and larger. Startups in software will be more plentiful. But still... do any of these facts contradict the fact that startups fuel job creation and the next evolution of our world and manufacturing jobs are radically less realistic as being price-possible in the USA?

[c1ue]

Re: Down the Start-Up Staircase

Mark(L),

I thought I was pretty clear: the impact of FIRE on living costs via housing, health care, taxes, etc have made both knowledge jobs and manufacturing jobs too expensive in the US.

Germany in contrast is able to be competitive on the world stage in both spheres, so it has nothing to do with 1st world standards of living.

Secondly I would point out that Facebook, Twitter, and whatnot are hardly productivity enhancing tools.

As part of my (new) field, I've done a lot of research on the economics of Internet 2.0

It is unsurprisingly very similar to Internet 1.0: lots of eyeballs, no money.

Shazam, a very nice service which converts a snippet of music into a song name, has over 10M users and is losing money

Pandora, a great Internet music service, has 50M users and *might* make $2M a year.

Valuation as well as invested capital isn't necessarily value.

As for semiconductor startups - I'd look more closely. I'd bet money that a majority of them are specialty design houses looking to create 'soft' IP - like PA Semiconductor which was bought by Apple. On the one hand, it is a semi startup. On the other hand, the principals in that deal are the same principals behind Intrinsity - so really it isn't a startup except in a literal sense. The founding capability is simply reharvesting.

The same can be seen in my former industry. The entire semiconductor 'test' software segment is composed of 3 different iterations of software test by the literal same guy, but for 3 different companies.

Give me $10M, and I could probably put out a competitive tool in most segments of the EDA design software industry. But it isn't innovation, it is just harvesting one or three key guys out of a corporation.

[MarkL]

Re: Down the Start-Up Staircase

...the impact of FIRE on living costs via housing, health care, taxes, etc have made both knowledge jobs and manufacturing jobs too expensive in the US.

Well, as I said before, I agree with that point.

Secondly I would point out that Facebook, Twitter, and whatnot are hardly productivity enhancing tools.

As is true for all of Hollywood, theme parks, the largest part of the book industry, television, the music industry and about 80% of all retail consumer purchases. They are all profit generating and longstanding industries nonetheless.

As part of my (new) field, I've done a lot of research on the economics of Internet 2.0
It is unsurprisingly very similar to Internet 1.0: lots of eyeballs, no money.
Shazam, a very nice service which converts a snippet of music into a song name, has over 10M users and is losing money
Pandora, a great Internet music service, has 50M users and *might* make $2M a year.

Much of what you say is true. Innovative and revolutionary technologies generate lots of waste as new models are tried and fail. However, some of them succeed and our world is changed. This is obviously true of both Internet 1.0 and 2.0. Ebay and Google are two of the largest employers in the valley. Salesforce.com (arguably one of the earliest to adopt 2.0 program via the internet technologies) is also. Facebook is hiring like mad. iTunes is a 2.0 technology.

So the point remains... startups create jobs. And for every big company job created, 150 are created at small to medium startups. Will a huge chunk of them go away? Absolutely. But:

-- 1. People are still employed for a few years at those startups that won't make it!
-- 2. A huge chunk of those jobs will also remain!
-- 3. New startups come along to take the place of the old ones... the next big startup space is the green revolution.

I started my first company in Silicon Valley 30 years ago. I've employed people almost that entire time and am now... I am on my 3rd startup of my own, and I've worked for 3-4 others. Lots of jobs... lots of productive and creative churn like you list above.

As for semiconductor startups - I'd look more closely. I'd bet money that a majority of them are specialty design houses looking to create 'soft' IP - like PA Semiconductor which was bought by Apple. On the one hand, it is a semi startup. On the other hand, the principals in that deal are the same principals behind Intrinsity - so really it isn't a startup except in a literal sense. The founding capability is simply reharvesting.

Investing in proven successful startup teams doing new tech is "reharvesting"? Each of these startups come to the investors with some new angle, some evolution of product, service, some way they are going to do better than their older slower bigger companies. And they do it again and again. I tip my hat to proven successful startup teams!

But the question is, do these startups employ people... and of course they do. Intrinsity who you mention employed 160 people and was sold for 110 million. Apple bought them because they wanted to keep 350mghz to themselves for awhile... and this IS "real innovation." Take apart an iPad or iPhone and Intrinsity and PA Semiconductor technology who you mention is there. The innovative iPad and iPhone are direct results of the innovation of the two companies you mention which is why Apple spent a half a billion on the combination of the two.

The same can be seen in my former industry. The entire semiconductor 'test' software segment is composed of 3 different iterations of software test by the literal same guy, but for 3 different companies.

Good for him! Gave you a startup job didn't it?

I know this segment a bit, and the Intel ICE I worked on 30 years ago isn't ANYTHING like the tools available today. Even the tools of 5-6 years ago are quite antiquated by 2010's comparison!! So... innovation is occurring in this process.

Give me $10M, and I could probably put out a competitive tool in most segments of the EDA design software industry. But it isn't innovation, it is just harvesting one or three key guys out of a corporation.

You only mention you could "probably" put out a competitive tool... but not a better one and "probably" isn't very confidence building. If you could evolve what you're saying slightly to "confident I can put out a better tool", or better yet, a revolutionary tool, (maybe one that leverages SaaS and the Cloud) YOU SHOULD. Of course the process isn't quite that simple.. you'll also need to provide the inspiration and leadership for the 3 guys, SELL the VC's on giving you the money, actually build the product for real, MARKET it successfully, and then SELL the company to Apple or equivalent, creating a 100 or 200 jobs along the way!

It ain't easy buddy! But if you can... GO... create some jobs!!

You implications that innovation isn't occurring and that ALL of Web 2.0 has no value is simply wrong. My company provides services for 3 Web 2.0 companies all in the productivity space (Big Machines, Eloqua and Salesforce.com). Billion dollar employers with thousands of employees each have already been created and far more jobs via numerous smaller employers. Is some of it a bubble and valueless? Absolutely, that's part of the process. But during the cycle LOTS of jobs exist that didn't, and after the cycle many new productive ones remain. Look at the stats... startups are the engine of most of the job creation of the last 30 years. Innovation, Silicon Valley and it's clones across the country is what kept America great during the loss of all of our manufacturing backbone.

My conclusion remains... startups create jobs. Is America pricing itself out of the Knowledge worker market? Certainly and fixing that is critical. But it's still the best path we have! Many good "3 folks" exist here that don't exist overseas and we should leverage them to build more startup employers as quickly as we can. The capital and VC infrastructure exists here and frankly what alternative do you propose for America? Bringing back mfg against the price and environmental advantages of China is unlikely to succeed (except maybe via startups in robotics) and would be painful and have a negative impact on US quality of life.

So to your point, let's reduce the burden on US overhead so this process is accelerated instead of slowed as it is by excessive HR, OSHA, Taxes, Lawsuits, Healthcare, regulation, etc. And to mine, let's educate more people to be entrepreneurs and train more of the creative "3 people" that enable the hundreds of jobs that is the final remaining functional piston in the engine of the US economy.

[MarkL]

Re: Down the Start-Up Staircase

Is the root of the problem that companies are free to outsource to lower costs? Or is the problem that a combination of taxation, regulation, litigation, labor laws and other government interference make it not competitive to manufacture in the US?

While the above issues slightly contribute to the problem, none of those issues is the elephant in the room. The real problem is that the Chinese standard of living and wage requirements is dramatically lower than the USAs. Nobody in the USA will work for $100 a month as happens in China. There are LOTS of people in China (and India and Russia, and Indonesia) so this will continue for a good while yet.

Regardless of what is or is not done, I don't think there's any way to "save ourselves" that doesn't involve at least some lowering of expectations/standard of living.

Damnit... you're dead right on this point!

[ViC78]

Re: Down the Start-Up Staircase

While the above issues slightly contribute to the problem, none of those issues is the elephant in the room. The real problem is that the Chinese standard of living and wage requirements is dramatically lower than the USAs. Nobody in the USA will work for $100 a month as happens in China. There are LOTS of people in China (and India and Russia, and Indonesia) so this will continue for a good while yet.

Speaking for a purely seflish perspective of an educated American, wouldn't the solution to this issue be old fashioned protectionism? Of course, we would be paying for a widget but that would be more than offset by the rise/stability of wages. Globalization has not been very kind to the western population except for its corporations.

[MarkL]

Re: Down the Start-Up Staircase

Speaking for a purely seflish perspective of an educated American, wouldn't the solution to this issue be old fashioned protectionism? Of course, we would be paying for a widget but that would be more than offset by the rise/stability of wages. Globalization has not been very kind to the western population except for its corporations.

Protectionism really doesn't work very well for lots of reasons. Most consider the Smoot-Hawley protectionist act the primary cause of the Great Depression.

First, Let's say big screen TVs were made in USA with a price of $2000 instead of China's $800. First, the USA market would shrink considerably because of the increased price point. Second... with protectionism there are always ways around these things. Good old smuggling is an option of course, and laws seem to often have ways around them. Need a 52 inch "monitor" anybody? Care to buy a "German" TV that looks remarkably similar to the Chinese ones? These ways are all well known and the loopholes are VERY difficult to close. Capitalism works... even when it's forced to go underground!

Second, American "manufacturers" have to get their parts from somewhere and while in theory, someday, we could make EVERYTHING, the reality is that it takes over 2 years to setup a plasma screen fab line and an investment of almost a billion dollars, and getting the USA EPA to allow it to happen also makes it unlikely. But if we are protecting ourselves by taxing Chinese imports, guess what.. the costs for parts to the American TV manufacturer go up! So now the American TV Mfgr has both higher parts costs AND higher labor costs. And this poor American mfgr can't possibly sell anything overseas because they have to compete with dramatically lower cost Chinese goods.

The first real loser in a trade war is thus the consumer. Everything at Target and Walmart doubles (or more) in price, the engine of commerce comes grinding to a halt and everybody stops buying things from everybody.

The final rub of course is that China retaliates with tarrifs on our exports. A lot of the manufacturing machinery China uses is actually built in the USA and the Chinese markets opening up is one of bright growth spots for American commerce. This would quickly drive those purchases to Europe and elsewhere. China is now doing a better job (still not a great job) at protecting American patent and copyright laws and if protectionism happened, Movie and Software knockoffs would suddenly increase while iPhone exact knockoffs with pirated software would show up alongside them.

The bottom line, is that Protectionism is at it's heart a tax... a particularly bad one because it negatively impacts the free flow of goods that makes capitalism work. And taxes always slow things down...

[HisHighnessDog]

Re: Down the Start-Up Staircase

(In my previous profession I worked for almost a decade in product development and process improvement. About 4 of those years I was in Asia.)

You are missing the main thrusts of Grove's article: "productionizing" an innovation (moving it from prototype to full scale volume production) is both (1) a massive driver for job growth, (2) a crucible in which further innovation -for the next generation of whatever product- is forged. The top manufacturers know this; certainly the top manufacturers in Japan know this.

Japanese auto and consumer electronics manufacturers charge more for their locally sold products than those sold in foreign markets. Moreover, in the case of automobiles, tax laws make it very expensive to retain a used automobile for more than a couple of years. So consumers have to buy new models pretty often. The result is that the Japanese consumer subsidizes the overseas competitiveness of Japanese manufacturers. This brilliant idea helps destroy overseas competitors.

(Note: While the Japanese have inflicted a lot of pain on themselves over the past 20 years, it wasn't through industrial policy, it was due to their being no better than us at controlling financial elites.)

The Chinese appear to be taking much the same strategy. It's tough to compete with near-slavery-level wages, yes.

Re: 'movie and software knockoffs increasing'; where have you been? At least 97% of the software in China is stolen. I don't happen to know the figure for music, but guess it is close to the same figure. It is very easy to compete when you systematically steal as much IP as possible.

Protectionism really doesn't work very well for lots of reasons. Most consider the Smoot-Hawley protectionist act the primary cause of the Great Depression.

First, Let's say big screen TVs were made in USA with a price of $2000 instead of China's $800. First, the USA market would shrink considerably because of the increased price point. Second... with protectionism there are always ways around these things. Good old smuggling is an option of course, and laws seem to often have ways around them. Need a 52 inch "monitor" anybody? Care to buy a "German" TV that looks remarkably similar to the Chinese ones? These ways are all well known and the loopholes are VERY difficult to close. Capitalism works... even when it's forced to go underground!

Second, American "manufacturers" have to get their parts from somewhere and while in theory, someday, we could make EVERYTHING, the reality is that it takes over 2 years to setup a plasma screen fab line and an investment of almost a billion dollars, and getting the USA EPA to allow it to happen also makes it unlikely. But if we are protecting ourselves by taxing Chinese imports, guess what.. the costs for parts to the American TV manufacturer go up! So now the American TV Mfgr has both higher parts costs AND higher labor costs. And this poor American mfgr can't possibly sell anything overseas because they have to compete with dramatically lower cost Chinese goods.

The first real loser in a trade war is thus the consumer. Everything at Target and Walmart doubles (or more) in price, the engine of commerce comes grinding to a halt and everybody stops buying things from everybody.

The final rub of course is that China retaliates with tarrifs on our exports. A lot of the manufacturing machinery China uses is actually built in the USA and the Chinese markets opening up is one of bright growth spots for American commerce. This would quickly drive those purchases to Europe and elsewhere. China is now doing a better job (still not a great job) at protecting American patent and copyright laws and if protectionism happened, Movie and Software knockoffs would suddenly increase while iPhone exact knockoffs with pirated software would show up alongside them.

The bottom line, is that Protectionism is at it's heart a tax... a particularly bad one because it negatively impacts the free flow of goods that makes capitalism work. And taxes always slow things down...

[chr5648]

Re: Down the Start-Up Staircase

If the US never started trading with china we'd never be in this problem. Should of traded with other first world countries that had comparable labor costs. What do you expect when the chinese will work for next to nothing.

[jpatter666]

Re: Down the Start-Up Staircase

(In my previous profession I worked for almost a decade in product development and process improvement. About 4 of those years I was in Asia.)

You are missing the main thrusts of Grove's article: "productionizing" an innovation (moving it from prototype to full scale volume production) is both (1) a massive driver for job growth, (2) a crucible in which further innovation -for the next generation of whatever product- is forged. The top manufacturers know this; certainly the top manufacturers in Japan know this.

Japanese auto and consumer electronics manufacturers charge more for their locally sold products than those sold in foreign markets. Moreover, in the case of automobiles, tax laws make it very expensive to retain a used automobile for more than a couple of years. So consumers have to buy new models pretty often. The result is that the Japanese consumer subsidizes the overseas competitiveness of Japanese manufacturers. This brilliant idea helps destroy overseas competitors.

Replace cars with pharma and you have the US version.....

[reggie]

Re: Down the Start-Up Staircase

Speaking for a purely seflish perspective of an educated American, wouldn't the solution to this issue be old fashioned protectionism? Of course, we would be paying for a widget but that would be more than offset by the rise/stability of wages. Globalization has not been very kind to the western population except for its corporations.

Yes, repeal Clinton's GATT. Thanks for the clarity. (James Goldsmith is the best reference on this)

If the US never started trading with china we'd never be in this problem. Should of traded with other first world countries that had comparable labor costs. What do you expect when the chinese will work for next to nothing.

Well, there was an enormous amount of effort put forth to open China for exploitation. I don't think anyone is going to give that up without a major fight. Kissinger and Deng were the front men on this, and then George Bush was sent in to do what he does best. It's a long long history of slime.