Vertical Pulse

The Search - A Book Review

I recently read The Search - How Google and Its Rivals Rewrote the Rules of Business and Transformed Our Culture by John Battelle. The Search illuminated the tremendous power of search applications as well as the future potential of search applications to become intrinsic elements of conducting ecommerce. Search tools are becoming more powerful as they are incorporating artificial intelligence and robotics. Searches are becoming more accurate as they are better able to make inferences based on the users click history. Search facilitates intent-based marketing which shifts marketing dollars from the unknown to the knowable.

Going forward, searches will be able to conduct some amazing functions. For example, by linking RFID tags to things such as luggage, search engines will be able to locate lost luggage. Also, as search engines include individual's computers, search engines will be able to locate things such as long-lost family photos. As the price of storage continues to plunge, the entire web may be saved on a daily basis which will allow searchers to conduct queries of events that happened on specific days.

Among other interesting information contained in The Search are the following:

• Since 2003, most search engines have evolved to differentiate terms by parsing a list of atomic phrases--phrases that have their own sets of results at the smallest levels. For example, when someone types in "York", the search application would believe that you are not looking for results that incorporate "New York".

• Search engines are using cue words that tip off the search engines to the context of the particular search. For instance, pages that contain biographies are tagged as being biographical. Thus, when a searcher includes "biography" in the search, the results will yield pages that contain biographies instead of just pages that contain the word "biography".

• Most search engines contain lists of stop words (such as "and" and "the") that are ignored. The use of stop words renders the search more accurate and accelerates processing times.

• Search engines have three core components. First, is the crawl (or spider), which gathers every possible page on the Web. Second is the index, the massive database created by that crawl. And the third comprises the user interface and search software, which take the index and make it available in an intelligent fashion to the end user.

• Other principles of search technology include annotation (a judgment about the cited site) and the frequency of such sites being linked by other sites.

• One problem with search is search engine spam which is irrelevant listings pushed up the index by bad actors looking to acquire free traffic.

• Companies should avoid hiring spirals in which each layer of management hires candidates that are less qualified so that hiring employees will not feel threatened.

• As much as 40% of some search companies' revenue is attributable to click fraud. Click fraud occurs when competitors or fraudsters click on ads with no intention to make purchases.

• Some of the ethical issues search companies face include disclosing information about their customers (of which they have voluminous amounts) in order to cooperate with law enforcement authorities and doing business in China where some search results are deemed off limits. As to the last point, most companies' brands do not suffer when they compromise with the Chinese government. However, since search companies' brands reflect knowledge and news, the brand can become tarnished when doing business in China which places limitations on knowledge and news. However, any company with international aspirations must conduct business in China.

• Due to an obscure SEC regulation, Google was required to begin reporting as if it were a public company when it was still a private company because Google had given stock options to more than one thousand of its employees.

The Design of Things to Come

I recently read The Design of Things to Come: How Ordinary People Create Extraordinary Products by Craig M. Vogel, Jonathan Cagan and Peter Boatwright. Among the insights are the following:

1. The idea of value is not to get more features for less money. Instead, value is the connection of a user to a product in a way that augments his lifestyle and makes his activities easier and better. Value is the product's ability to fulfill wishes, to meet expectations of fantasy. Companies should take the following considerations into account: A) Emotion - What fantasy do people expect from use of the product? B) Ergonomics - How easy and intuitive is the product to use? C) Aesthetics - Includes not only the visual, or form, but all the senses that interact in experiencing a product. D) Identity - A product is the physical statement of the brand identity and is central to its success. E) Impact - Addresses the societal influence connected to and addressed by the product. F) Core Technology - Addresses the functions that enable performance. G) Quality - Includes manufacturing quality as well as the product's fit and finish.
2. Design patents protect the form of an article of manufacture. Design patents protect the effort to create aesthetic innovation. If another design looks like the one drawn in a figure, it is in violation of the patent. A design patent generally has a more subjective interpretation, relying on an aesthetic viewpoint.
3. Trade dress is trademark protection for the look of a product or service that associates the product with the manufacturer. It is less specific than a design patent, but similar, broader, and of longer impact. Like a trademark, as long as you use it, you can maintain it. An example of trade dress is Nexium's "purple pill".
4. Provisional patents give a company a year of protection at a reasonable cost before it needs to invest in the more expensive full patent.
5. Innovation is the ability to find nonobvious opportunity in what, after the fact, seems obvious and needed to everyone else. It is the ability to see extraordinary potential in ordinary events. It is the ability to see how to fulfill the desire of others, to elevate their common, everyday world into uncommon lifestyle experiences.
6. Developing a sense of delight and trust in products is at the core of pragmatic innovation. Form and function should fulfill fantasy.
7. Innovation is not just about a good idea; it is a process of managing what can at times appear to be an army of people over a set amount of time making multiple interconnected decisions.

To find out more on IncreMental Advantage's Intellectual Property Conference Series, visit www.incrementaladvantage.com/conferences.

Reverse Mergers / SPACs Conference Highlights

The following points were among the insights elicited at our recent Reverse Mergers / Forward Momentum conference:

With regard to reverse mergers:

• The new 8-K rules will make full disclosure more onerous (since documents must be filed within 4 days of a transaction instead of the 70 days that was previously the rule) but will improve the quality of companies executing reverse mergers.
• Net operating losses are of very little value--as they can only be used when income is produced, they expire, and must be amortized over a long period of time--to companies that execute reverse mergers.
• Companies receiving PIPE financing from hedge funds must realize that these funds have very short-term time horizons.
• There is little merit into reverse merging into a pink sheet company other than cost savings.
• Shell providers should provide indemnifications when selling their shells. If they are not willing to provide the indemnifications, there are usually reasons relating to the lack of shell hygiene.
• High levels of free trading stock held by advisers such as PR firms and insiders is usually a sign of concern.

With regard to SPACs:

• Specified Purpose Acquisition Corporations are shell companies formed by management teams with industry experience and is organized with the purpose of effecting a combination with an existing business in the target sector.
• By law, 85% to 93% of the proceeds raised in the IPO for the SPAC are held in trust. The SPAC must sign a  letter of intent for a business combination within 18 months of the IPO or it will be forced to dissolve and return the assets in the trust to public stockholders. If a letter of intent has been signed within 18 months, the SPAC can close the transaction within 24 months. The target of the acquisition must have a fair market value that is equal to at least 80% of the SPACs assets at the time of acquisition. Shareholders must approve the combination.
• The management team of the SPAC typically receives 20% of the equity in the vehicle at the time of offering, exclusive of the value of the warrants. The equity is typically locked up for 2-3 years. Management typically agrees to repurchase about 10% of the outstanding warrants once they start trading after the IPO. In many cases, management agrees to pay for the expenses in excess of the amounts outside of the trusts if there is a liquidation of the SPAC because no target has been found.

With regard to China's demand for reverse mergers:

• There are 10 million mid-sized private companies in China. There are at least 10,000 to 20,000 companies in China with roughly $30 million in revenue and $10 million in net income. Out of these companies, at least 1,000 to 2,000 will want to have publicly-traded stock in the U.S. American investment banks are far too understaffed to take advantage of this demand by Chinese companies to go public through the traditional IPO route.
• It is extremely difficult to conduct due diligence on Chinese companies. Beyond language and cultural barriers, many Chinese companies solely use cash to transact their business which makes auditing nearly impossible. It is also often unclear how thoroughly the Chinese government privatizes its companies - there is often residual government ownership and influence.
• Reverse mergers with Chinese companies is difficult because it is still complicated to get money out of China. Also, government approval is required to execute direct share exchanges with Chinese companies and it is unclear how to receive such governmental approval. 

Conference materials can be obtained by contacting Neomi at 609-919-1895 x100 or neomi@incrementaladvantage.com. More this topic and more will be discussed at IncreMental Advantage's Alternative Exits Conference, December 12, 2006 in New York City. For more information visit www.incrementaladvantage.com/conferences or contact Neomi at 609-919-1895 x100 or neomi@incrementaladvantage.com.

The Transparency Trap (Preview)

The gratuitous public display of corporate self-flagellation is the latest palaver to hail from the stage of political correctness. The sultans of political correctness are advocating that companies expend their resources to set up blogs for the purpose of enabling dissatisfied employees, customers and corporate gadflies to voice their dissatisfaction with the company, its products and its policies. Providing these “constituents” a venue to express their feelings about a company is supposed to yield greater insight into the thinking of the company’s customers. Allowing employees to disseminate their dissatisfaction through corporate blogs is supposed to usher in greater corporate transparency.

I believe that such line of reasoning is an overwhelmingly myopic, shallow, and detrimental strategy. I recommend that corporate executives consider the following:

• Blogs are analogous to outdoor billboards. If someone were to vandalize a billboard with graffiti, any responsible company would have such graffiti removed. Instead, the dictates of political correctness encourage the submission of increasingly greater amounts of derogatory posts and the lionizing of those who contribute such posts.

• The reputation and perception of a company within its community are intangible assets. Just as corporate executives have a fiduciary responsibility to maximize the profits and value of the tangible assets of the companies that they manage, they have a fiduciary duty to enhance the intangible assets under their control. Actively facilitating the diminution of intangible assets which fall under an executive’s guardianship is irresponsible at best.
• Executives already know a good bit about their business and products. Every successful executive should know what the product’s weaknesses are and what the sources of customer dissatisfaction are. There are other ways of learning about these issues such as surveys, emails, and phone calls. Letting customers and employees air the company’s dirty laundry in public is no excuse for ill-informed management or for faulty information capture practices.
• Blogs absolutely do NOT facilitate dialogue. Comments on others' posts are typically far beyond the pale of what would pass for reaonably acceptable discourse. Maybe it is partly due to the cold appearance of words on computer screens, but comments on others' posts are typically ad hominem, spiteful and meant to be hurtful. Back and forth postings on blogs too often turns into a volley of juvenile name calling, smears and slights.
• Allowing employees to gripe on corporate sponsored blogs is supposed to facilitate transparency. This rationale blindfolds a cross-eyed and confused face. Instead of generating transparency it presents a warped and jaundiced picture of the company. Those who complain most often and loudest are not representative of the workforce and surely cannot be relied upon to present a balanced or comprehensive view of the treatment of the employee base. Encouraging employees to gripe risks lowering the morale of the entire workforce.

• Corporate-sponsored blogs do not provide a platform for the entire employee base to share their voices. In many cases, managers are reluctant to respond to accusations for fear of inflaming relatively minor sources of disenchantment. Their decision not to respond could often be taken as a sign of indifference. I do not believe that managers should feel compelled—or be criticized for failing--to address every sniveling whimper.

• Let’s not forget that at least some companies are not ensnared in this hallucinatory web of politically correct bullshit. Some companies are still focused on making a profit at the expense of their competitors. These companies could be your competitors. They take information gathering seriously and will press every advantage they can against their competitors to the fullest extent possible. Caterpillar’s Japanese competitors do not expect to find revelations in the daily air-mail delivery of the Peoria (IL) Journal Star they receive, but they scour every line of the newspaper to take advantage of any information they can glean about Caterpillar from its hometown newspaper. Caterpillar should not expend its resources to develop and maintain a venue to make its competitors’ information gathering easier. Neither should your company.

• It is unfortunate but true that the rule of economics is supplanting the rule of law in commerce today. Buyers that detect vulnerability on the part of their suppliers will press for contract renegotiations. Buyers conduct cost analysis on their suppliers and seek to beat down prices they pay to an area that approaches their suppliers’ marginal costs. Providing too much information about the internal operations of your company confers your adversaries with advantages in negotiations.

Corporations should unapologetically act as confident entities with defined missions, not as sniveling insecure amebas reduced to reflexively genuflect at every whim and vacuous regurgitated buzzword. Corporate blogs should be used to further the corporation’s mission, not as an electronic Speakers’ Corner for those with agendas anathema to the interests of the corporation or for those whose postings cast the company in an uncomplimentary light.

Issues related to transparency and negotiations will be addressed at our Mergers and Acquisitions Due Diligence Conference in San Francisco on April 17-18, 2007. Contact Neomi Barazani for more information. Issues related to blogging, marketing and reputation management will be addressed at our next Viral Marketing Conference.