There was something surreal about watching President Obama take the oath of office from a hotel room in Karachi, Pakistan. Several times, I wondered whether there were more suicide bomb barriers surrounding his dais or my hotel. Suicide bombers had nearly destroyed the hotel a year or two earlier, and the predictable reaction—to erect sufficient vehicle barriers to stop more than one simultaneous attack—had of course been implemented. And so I watched, from 13,000 miles away, as America took what I profoundly hope will be the first of many steps towards reestablishing its international reputation as a symbol of freedom, all the while knowing that I was under strict orders from our hosts not to leave the building.

All around me were little security instruction sheets, thoughtfully Xeroxed by the hotel staff and placed in every room. From the typical (“this water is unsafe for drinking; kindly enjoy the complimentary bottle of mineral water provided”) to the stern (“do not stand on balcony; snipers may be active”), the warnings combined to deliver the message that, thanks to the efforts of less than 1% of the population, Westerners are simply not welcome in Pakistan. 99% of Pakistanis we met were hopeful, interesting people, happy to talk to an American (and to ask us about our new president—more about that in a different post). But all I had to do was look out my hotel room window to realize that it is the 1% who rule the country.

View from my Karachi Hotelroom

As they so often do, this picture tells the story better than I can. The balcony is enclosed in a net, lest grenades be thrown up onto the landing. The wires above the pool are for god-knows-what security technique. (My guess: since they are either grounded or energized, probably an anti-eavesdropping measure which doubles as a mechanism for defeating radio frequency bomb triggers, although my mobile phone worked just fine underneath them, so perhaps not.) There were magnetometers, x-ray machines in the lobby, and nearly every entrance to every building was peopled by thoroughly un-reasuring armed guards. There were small trucks parked in the parking lots of both “Western” hotels, each filled with four chain-smoking Pakistani infantrymen, on top of which was mounted what looked like an M60 (.50 caliber machine gun). Two bomb-sniffing Labrador retrievers worked the parking lot. ID checks were performed endlessly.

I doubt that any experience since 9/11 has reminded me that this really is a war. Not a war which gives our government the right to abrogate our Constitution, but a war nonetheless. And until it ends, Americans traveling abroad had better remember that the actions of our own government (and in particular the recently-departed administration) catalyze reactions abroad which pose as grave a threat to our well-being as any other. (Until 2002, there had been no attacks against Western targets in Karachi. That all started after we reacted to 9/11.) In the end, no matter how hopeful I am that the inauguration of President Obama will set us off to righting our standing worldwide, we will remain “the enemy” for a long time to come.

source¹

To listen to Robert Nardelli (Chrysler, formerly CEO of Home Depot), his company has minutes remaining.  I’ve certainly expressed a sense of urgency before in my job when working to close a deal, but it’s impossible to listen to him and not sense something profound.  Three of our great industrial giants are willing to speak publicly about endgame.  Rick Wagoner (GM) seriously discussed a “pre-packed” Chapter 7 bankruptcy (surely a trial balloon alternative if ever I’ve heard one) by quoting marketing studies which show consumers are overwhelmingly unwilling to buy a car from a bankrupt company.  When was the last time you heard the CEO of a major non-financial company speaking about such potential downsides alongside his competitors? Extraordinary times indeed.

But not extraordinary enough.

Towards the tail end, Alan Mullaley (Ford, formerly Boeing) was asked whether his company would exceed the new CAFE fuel economy standards.  His response?  That Ford would barely be able to make them, and would not be able to exceed them.  The others agreed with him.  That one response convinced me that any bailout of US automobile manufacturers should 1) be totally focused on saving jobs (millions of them, potentially), and 2) must be so severely punitive of the companies themselves that they don’t get out of jail free.  These three companies have succeeded in lobbying their way out of innovation legislation (fuel economy, safety, public transport, etc.) for decades.  Consumers have responded by choosing foreign manufacturers preferentially (e.g. Toyota who pushed hybrid technology as a differentiator).  US manufacturers drop to the bottom of the list of consumer choices because of the manufacturers’ complacency, and then a contraction comes along and endangers the bottom of the barrel.  Surprise, GM, Ford, Chrysler, you now inhabit the bottom of the barrel precisely because of your complacency!

A little capitalist Darwinism is in order here.  If these guys had worked on fuel economy and alternative technologies 20 years ago, CAFE standards would be unnecessary now.  For want of those prior investments, it is not the Government’s job to subsidize their lack of business skills.  Do what we need to to save the jobs (lest we further endanger the economy), but otherwise I vote let these companies suffer the fate of others who stick their heads in the sand.

1. Businessweek online, “Auto Execs in the Hot Seat” http://www.businessweek.com/bwdaily/dnflash/content/nov2008/db20081118_113319.htm?chan=rss_topStories_ssi_5

Not so.  Enter Sequoia Capital’s “RIP Good Times” presentation.  Within a day, eight people had forwarded it to me, along with notes taken by a briefly-anonymous Sequoia portfolio CEO.  Shortly thereafter came the Benchmark Letter, which another investor and our corporate counsel both forwarded to me.  And the Ron Conway email.  The argument is that revenues and earnings will fall off the table (thus perhaps justifying the fact that today’s S&P 500 is trading at a pretty low average P/E of 10.5), thus necessitating tectonic readjustments to spending.

And there it was: in one great, coordinated movement, Silicon Valley panicked.  It was as if the Valley remembered 2000-2001 and couldn’t sleep.  A friend of mine, at a Seqoia company, worked the weekend and executed a 40% layoff earlier this week.  Hi5 cut staff, Zillow and Adbrite did the same, and the list goes on and on.  One day everything is fine;  the next, the world is ending.  Trader mentality hit Sand Hill Road.  With the zeal of the converted, a paroxysm of cost-cutting swept Valley CEOs.

This “stampede for the exits” mentality of supposedly long-term investors here in the Valley makes zero sense.  One of my Directors correctly pointed out that Moritz et al. at Sequoia were undoubtedly “firing for effect,” and I’m sure they were, but tell that to the employees laid off by my friend’s Sequoia-backed company.  The problem with making rapid adjustments to early stage companies is that the adjustments themselves effect the business.  There’s a Heisenberg Uncertainty Principle in startups:  trimming too fast or too precipitously will injure the company far more deeply than it would a larger, established company.  Why?  Because start-ups in particular rely on their employees to go the extra mile, think the impossible is possible, burn the midnight oil, and invent the ingenious.  They also rely on their employees knowing they’re involved in something special, relishing their creative environment, and collaborating with their colleagues.  (For which, of course, they need to have colleagues…!) Take all that away, and a start-up is just a thinly-staffed, under-capitalized company with no track record or proven market.

There’s another, more profound risk, however:  react too strongly and Heisenberg will assure your startup misses the market opportunity it’s not expecting.  The problem with over-optimizing, particularly in venture-backed companies, is that they will miss the unexpected, creative opportunity, either because they are so busy dealing with the ramifications of precipitous cost-cutting or because they will be so under-staffed and so hyper-focused on cash flow that they will have neither the energy nor the creative spirit to do something daring when the opportunity presents itself.

Does this mean we should be spending profligately and ignoring the broader dynamics of the economy?  Of course not.  No CEO in his or her right mind would do so.  But the fact remains that what makes Silicon Valley great is certainly not its ability to play the part of proverbial “tail” to the economic dog which wags it.  Every one of us should take a careful look at our spending, our sales forecasts, and make sensible business decisions based on what we see.  (In our case, we see changes coming and are adjusting for them.  We’re cutting where we need to, investing where we can afford to, and otherwise treating the shake-up as an opportunity to test every single one of our assumptions.  And, yes, if one of those assumptions changes and we see a problem, then we’re going to cut spending.)  But lay off 40% of staff just because someone gave a presentation?

Fortunately, voices of sanity have begun to speak up.  My friend and colleague Pascal Levensohn (full disclosure: also now an investor and Board member in my company) wrote an excellent post today putting context around the Sequoia presentation.  And none other than the Sage of Omaha himself is going long on US equities.  All of us running businesses under these economic circumstances are well-served to create a back-up plan (the “survival plan”), take a whack at expenses wherever and whenever possible (hey, shouldn’t we be doing that all the time anyway?), test every single assumption in our models, and perhaps think long and hard before hiring additional staff.  But then we should go back to work, build amazing businesses, and remember that Silicon Valley is about the future and we’re in charge of creating it.

What would society be willing to pay to eliminate this $3.1 billion a year medical cost?  It turns out that two of the authors of that JAMA article tried to estimate it in a previous article in the Harvard Health Policy Review, which I wasn’t aware of when I made my previous posting.  According to their article, Duke professor Peter J. Cook and University of Chicago Professor Jens Ludwig believe the number was perhaps as high as $100 billion in 1998 (or $125 billion in my back-of-the-envelope estimate of 2008 dollars).² Here’s there logic:  in a 1998 study conducted by the National Opinion Research Center, the thousand US households surveyed were, on average, willing to spend an additional $239 dollars each to reduce gun violence by 30% in their state.  Do a little math using 2008 dollars³ and 2008 households⁴ and get:

$34 billion.  How do we get to $120 billion?  The above calculation reflects what the US households would be individually willing to pay to reduce gun violence by 30%.  Assuming a linear increase in willingness to pay to reduce by 100%, the Cook and Ludwig suggest the tab looks like this:

(In fairness, I have some concerns about this extrapolation.  Saying I am willing to spend $239—or $303 in today’s dollars—to reduce gun violence by 30% does not necessarily mean I’m willing to spend $1,010 to eliminate it completely.  And certainly, as the authors point out, there may be some real costs to eliminating gun violence by 100% that a linear extrapolation will not account for, even if I were willing to pay for it.  Nevertheless, if the precise figure is wrong, surely the scale is not.)

Add to this $113 billion the roughly $10-20 billion annually in costs attendant to suicides and gun-related accidents and you land somewhere between $123 billion and $133 billion—call it $125 billion in nice round figures.  That’s a big number no matter how you look at it:  it roughly equals the combined annual budgets for the US Department of Health and Human Services and the US Department of Education, or somewhat more surprisingly, the combined annual budgets of the US Department of Homeland Security, Department of Energy, Department of Justice, Department of Agriculture, Department of Transportation, and NASA.⁵  (By the way, think this is an abstract comparison?  Perhaps, but remember:  we pay for all of these government agencies, so we already perceive their value, just as we perceive a value in reducing gun violence.)

If all this talk of big numbers is giving you a headache, the good news is there are simpler and more cost-effective solutions than seeking the American peoples’ collective budgetary allocation for half again as many federal agencies as they’re already funding.  Take a look at simple and effective programs like Speak Up! and Ask!, both run by my friends at PAX, which seek to eliminate school gun violence by encouraging kids to speak up if they know of something which might happen (in the case of Speak Up!) and encourage parents to ask if the houses at which their children are playing contain guns (in the case of Ask!).  These are fabulously cost-effective programs, and their results (here and here) are speak for themselves.

1. Philip J. Cook; Bruce A. Lawrence; Jens Ludwig; Ted R. Miller The Medical Costs of Gunshot Injuries in the United States JAMA. 1999;282(5):447-454.
2. Philip J. Cook; Jens Ludwig; The Costs and Benefits of Reducing Gun Violence Harvard Health Policy Review. 2001; Vol 2, No. 2.
3. http://www.westegg.com/inflation/infl.cgi
4. Day, Jennifer Cheeseman, Projections of the Number of Households and Families in the United States: 1995 to 2010, U.S. Bureau of the Census, Current Population Reports, P25-1129, U.S. Government Printing Office, Washington, DC, 1996
5. http://en.wikipedia.org/wiki/United_States_federal_budget

Buried within the “Primary Sources” section of next month’s The Atlantic is a section appropriately headed “Seriously Funny,” recounting a report from the Project for Excellence in Journalism at journalism.com.  The journalism.com report summarizes a number of studies by the Pew Research Center for the People and the Press, one of which offers the following surprising comparative current events knowledge scores:

source²

Your eyes are not deceiving you:  The Daily Show and Colbert Report’s viewers actually scored higher on this particular test than did NPR listeners. (Note:  I want a margin of error on this measurement, and the Pew study doesn’t identify one, so it’s hard to tell how meaningful this 3% difference is.)  But there is no question that the data corroborate the earlier Knowledge Networks study:  Fox News Channel yet again brings up the rear.

Pew goes a little further than the Knowledge Networks study and conveys some of the audience demographics.  Of particular interest, for example, is the fact that NPR listeners are more likely to have graduated college than regular consumers of any other news media other than major newspapers’ websites, and that yet again Fox News Channel lags behind:

source³

There are some surprising numbers in these demographics, too:  The Daily Show’s viewers may know marginally more about current events than listeners to NPR, but they are substantially less likely to have graduated college (only about 75% as likely).  Equally surprising is that the Daily Show’s demographic is slightly less likely to be young than regular readers of major newspaper websites or Google/Yahoo! news.  In other words, if you’re aged 18-29, you’re most likely to get your news online.

Or, to put it another way, if you’re over 29, why are you reading this? 

1. Michel was then CTO of Knowledge Networks and his colleague Stefan Subias, conducted by PIPA (the Program on International Policy Attitudes) and published in Political Science Quarterly
2. The Pew Research Center for the People and the Press, Public Knowledge of Current Affairs Little Changed by News and Information Revolutions
3. The Pew Research Center for the People and the Press, Public Knowledge of Current Affairs Little Changed by News and Information Revolutions