Wednesday, August 12, 2009

Competitive Crowdsourcing

The Netflix Prize reached its final stage last month almost three years after it began. For those unfamiliar with the competition, Netflix posed a challenge to the scientific community to develop an improved collaborative filter algorithm for use in determining Netflix customers’ cinematic tastes. The challenge was to improve on the current Netflix algorithm by at least 10%. Although a small improvement in percentage terms, the target was much harder than originally thought and has attracted 51,000 researchers since 2006. Ultimately there were two winners here. First is the research group that claimed the $1m prize. And then there is Netflix itself. The competition was a clever idea, and proved much more capital efficient then hiring scores of engineers, outsourcing or buying a collaborative filtering start-up. With minimal upfront costs Netflix now has a much improved product that is worth considerably more than the $1m payout.

Aside from learning about the fascinating world of collaborative filtering and algorithms, the exercise revealed the competitive nature of scientists, mathematicians and engineers. Of course, the prize money was an important catalyst and attention grabber, but it was the prestige associated with the battle of intellectual minds that lit a spark and kept these math geniuses going although way to the final stage.

Pride has always been a strong driver of innovation in the scientific and academic community, but is distinct from the pride of an entrepreneur, who is foremost driven by economic considerations. In science, there are grants and there are prizes. The former funds specified projects in the hope they succeed (e.g. NIH, DARPA). The latter are awarded in a fairly subjective manner for past achievements (e.g. Nobel, UNESCO, etc.). What we clearly don’t see enough of, are competitions, where prizes that are awarded for meeting a defined and measurable goal.

It is perhaps less scientific and more commercial, but such competitions can galvanize both entrepreneurs and scientists to pursue a worthy goal…and I am wondering why we don’t see more of them. After all, competitions not too dissimilar to this once spawned the world’s first marine chronometer and parking meter. Such competitions are a form of “crowd sourcing,” except that there is a fairly specific goal and a payout to the winner.

It reminds me of the X-Prize Foundation, which promotes scientific and entrepreneurial achievements that benefit humanity through $10m awards to entrepreneurs and scientists who are the first to achieve an objective goal. The most famous of these awards was the Ansari X-Prize, which awarded the prize to the first group “to launch a spacecraft capable of carrying three people to 100 kilometers above the earth's surface, twice within two weeks.” In retrospect, the monetary reward has little to do with spurring teams to win Ansari X-Priz, as the prize money is almost certainly not the incentive given the vast sums of money often invested in the projects.

Often forgotten is the fact that the Ansari X-Prize was modeled after similar prizes given away in the early twentieth century to spur the creation of the aviation industry. Most notably, Charles Lindbergh won the Orteig Prize for flying across the Atlantic in fixed wing aircraft. Here the cost was most certainly more than the $25k prize, as 6 lives were lost in 3 different crashes.

The recent success of the Ansari prize in turn prompted Richard Branson and Al Gore set up the Virgin Earth Challenge, which promises $25m to promote technologies that removal of greenhouse gases. Cisco too has the I-Prize. However, the Virgin and Cisco competitions are more akin to awards for past achievements, as they are not well defined, objective competition.

The more nagging question I have is why more companies and government institutions don’t use a similar strategy for solving complex problems. Perhaps they are simply afraid to reveal their technology holes or give away ideas to entrepreneurs. Nevertheless, for corporations brave enough, companies such as Innocentive, BrightIdea and Big Carrot offer a hosted platform, or exchange, for creating competitions and sourcing ideas/solutions from the masses. I look forward to seeing companies, large and small, use competitive crowd sourcing in the future, as it may prove a core part of corporate R&D, just like M&A and outsourcing are today.

And what a case of serendipity that as I write, I discover that Netflix is preparing a Netflix Prize 2!

Monday, August 10, 2009

Stanley and the Giant Shekel

For those of you not living the Shekel-Dollar drama of the past year, I wanted to give a quick update. Twice over the past year, the Israeli export economy (including all high tech), has been jolted by the rapid strengthening of the Israeli currency. Versus the Dollar, the Shekel gained almost 25%, then lost it, and was most recently showing worrying signs of strengthening yet again. This might be great for those Israelis traveling abroad during the August vacation, or Israeli peddlers of Ahava Dead Sea products in suburban American shopping malls, but it’s downright awful for the industrial and high tech sector! In the current economic environment it’s probably the worst possible thing that could happen, especially given our natural dependence on exports.

The drama with our central bank started back in March of 2008 when the Shekel reached a low of 3.2 to the Dollar (after sitting around 4.2 for an extended period). Chairman of the Bank of Israel(our Federal Reserve), Prof. Stanley Fischer, announced he would start purchasing $25m a day to take advantage the strong shekel and increase Israel’s foreign currency reserve which then stood at $29bn. It worked for a while, until the Shekel began to steadily rise again. Most recently, Fischer started spending $100m a day; taking Israel’s reserves to an all-time high of $51 billion (India only has 5x that amount). Today he aggravated many and committed himself to a different form of intervention spending anywhere between zero to several hundred million dollars a day.

Most countries have the opposite problem of too weak a currency, which creates a real burden for individuals and the state when purchasing vital imports and natural resources. Our problem is that because Israeli exporters sell their products in Dollars and Euros, the rising cost base of Israeli companies (labor) actually threatening the country’s long-term competitiveness. Our shiny new car is cheaper, but the owner of our R&D center is already drawing up plans to move the facility to China.

There are many potential causes for the rise in the Shekel, including the weakening of the dollar versus most other currencies. We can speculate about speculators, about Israel’s pending entry into the OECD and pending upgrade to “developed country” in the MSCI composite. However, the real problem is that our economy and currency markets are simply too small, and easily moved by large transactions such as a block sale of stock. It’s notoriously difficult to assess the true value of a currency, but as a consumer and venture investor, I know the shekel is too strong. Unfortunately, the Big Mac index doesn’t really support my view, but it doesn’t matter (it doesn’t negate it either). Take it from me when I say Israel needs to be at a discount to the US market, and when the cost of high tech labor approaches that of the US, we venture capitalists start pondering our 6-day work weeks and trans-Atlantic jetlag.

For start-ups that take their investment in dollars and spend in Shekels, the fluctuations can be hazardess. As a board member, I advise my start-ups to use a conservative exchange rate for budget planning and then to lock-in at least 9 months expenses at a fixed rate.

Bank to Stanley.
At first analysts and columnists predicted that the Bank of Israel would fail to tame the free market, but they were forgetting that the Bank has infinite resources at its disposal…the ability to print all the shekels the world wants. As long as there are buyers, Stanley is happy to keep the mint working overtime. As a reminder, this is not a repeat of the fabled battle of George Soros against the Bank of England, but the opposite!
Like me, Fischer is an import from Washington, and former citizen of an African apartheid state (Northern Rhodesia). He likely doesn't remember, but I met him in his Georgetown home in the early '90s when he was at the IMF, and discussed our mutual interest in Israel and Zionism. The point I am trying to make is that one should never underestimate the resolve of such an accomplished immigrant. Fischer may halt his dollar buying binge for other reasons, but I am rooting for him day and night…and so should you if you want Israeli high tech to succeed.