Rules of the Rainforest

San Diego venture capitalist and entrepreneur Greg Horowitt took the EDC board of directors on a virtual zip line tour of his new book “The Rainforest: The Secret to Building the Next Silicon Valley” at a recent meeting. San Diego has served as a living lab for Horowitt, who is one of the founders of Global CONNECT, a San Diego-based network committed to growing new technology clusters worldwide.

WSJ Column by Victor W. Hwang: “Show Users Value Before They Show You the Money”

Traditional business wisdom says that revenue is king, above all else. However, the brief history of the app industry seems to contradict that notion. Many of the business models for successful, profitable apps share one feature: They are brilliant at building ecosystems. Therefore, the lesson for app developers is perhaps counterintuitive. To make more money, don’t focus on revenue first. Instead, focus on growing ecosystems.

Announcing our new water startup, bringing life-saving technologies to the world!

Liquidity Corporation to Launch Revolutionary Water Purification Technology Products

Founded by top water industry executives and backed by a syndicate of Silicon Valley investors, company is bringing to market next generation of technologies for low-cost clean drinking water without need for electricity, chemicals, or high pressure.

Alameda, CA (PRWEB) February 20, 2013

Liquidity Corporation, a water purification company that has been in stealth mode, announced that it is launching new technology products to purify drinking water. The company’s first generation product is expected to enter the market in the coming year. 

For several years, the company has been quietly developing a portfolio of breakthrough technologies for purified water. The company’s investors include leading venture capital firms: GSR Ventures, Capricorn Investment Group, and T2 Venture Capital.

According to CEO Michael Hawes, “The scarcity of clean drinking water is one of the great challenges of the world. Experts say up to 45% of infant mortality cases in some regions can be attributed to contaminated water. 3.4 million people, mostly children, die annually from water-related diseases. There is tremendous demand for next-generation technologies that do not require electricity, chemicals, or high pressure, and which will cost households only a few pennies per day. We are excited and proud to bring this innovation to the world.”*

The company’s founding team is composed of some of the top figures in the industry, including: Dean Spatz, the father of industrial reverse osmosis who founded and was Chairman and CEO of Osmonics (acquired by General Electric); Mark Kachur, the former Chairman and CEO of CUNO, a market leader in microfiltration and residential filtration (acquired by 3M for $1.2 billion); and Michael Hawes, the former Vice President of the Worldwide Water Group of 3M and former General Manager of CUNO Pacific. An additional co-founder is Victor W. Hwang, an investor and entrepreneur at T2 Venture Capital, a firm that builds companies to commercialize new technologies from scientific research. The firm has also recruited Sylvie Chavanne, former technical head of Brita Americas, to lead its research division and John Friedl, a senior executive in manufacturing and process engineering, to lead its engineering division.

According to Mark Kachur, “Billions of people still lack dependable access to clean drinking water that does not contain dangerous bacteria and viruses. We have a once-in-a-generation opportunity to make a real difference in people’s lives.”

Dean Spatz echoed, “A water purifier that works without electricity, chemicals, and high pressure has been the Holy Grail of the water industry for decades. We believe the time is now to overcome this challenge.”

Victor W. Hwang added, “We are excited to bring together this Dream Team, perhaps the greatest startup team ever assembled in the water industry. Our executives, scientists, and investors are all motivated by a common vision: to make cleaner, cheaper drinking water more accessible to the world.”

In addition to members of the founding team, the company’s board also includes veteran Silicon Valley investors Kevin Fong (representing GSR) and Dipender Saluja (representing Capricorn).

For more information about the company, which is based in Alameda, California, please contact Sandi Wong at swong(at)liquico(dot)com or +1-510-522-1735. 


5 Reasons the Government Fails at Venture Capital

President Obama is outlining a multi-billion dollar plan to map the human brain.  The goal is to “to do for the brain what the Human Genome Project did for genetics,” according to The New York Times.  But do such government investments in science and technology really work?  Do they translate into commercial and economic value?

Many assume they do.  Departing Secretary of Energy Steven Chu, on February 1, wrote a letter decrying the “Stone Age” mentality of the critics of government investment in clean technologies.  There is arguably some truth in what Secretary Chu wrote.  But there is also some truth in what critics say about the relatively poor return of government investments in new technology development.  So what is the real answer?

You can read the rest of this article here:

The Rainforest translated and published in Russian

Check out the launch event in Russia recently, with pics of our own Greg Horowitt…

The Rainforest translated and published in Arabic

This was published last October, so this link is a bit belated…

Poverty traps and prototypes

Notes on the practice of innovation and technology commercialization.

It was a bracing day in central Russia, the sun sparkling off ice crystals suspended in the still dry air, but the director of a physics and engineering research institute was worried. His institute employing some 700 researchers was working hard to build on its good reputation for innovation to increase its income from joint R&D contracts with industry. Several large domestic and foreign firms had negotiated new contracts with his institute, but these were mostly short term, for proof of concept or initial prototype developments.  After these were completed the contracting firms said they would continue future work themselves. Some 5,000 miles away to the south west the sun was also shining, although the temperature was markedly higher, a West African small business owner was also worried.  It seemed however hard she worked she could not earn her way out of depressing poverty. 

What do the research institute director and the small business owner have in common? Both are caught in ‘traps’ – a ‘poverty trap’ for the small business person and a ‘positioning trap’ for the research institute.

Poverty traps have been heavily analyzed by economists and the concept is shown here only as a stimulant to solving the director’s problem through connecting apparently disparate circumstances. To paraphrase the discussion in the 2011 book Poor Economics by Abhijit Banergee and Esther Duflo: “There will be a poverty trap whenever the scope for growing income or wealth at a very fast rate is limited for those who have too little to invest, but expands dramatically for those who can invest a bit more.”

If your future income, as influenced by your income today, is lower than your income today, the growth curve is below the diagonal line as in the diagram on the left (the S curve) and you will become poorer and poorer. The 45 degree line represents income equality for present and future.



Banergee and Duflo point out that many economists believe that the world usually looks more like the diagram on the right (the L curve). “There is no poverty trap in this world: Because the poorest people earn more than the income they started with they become richer over time until eventually their incomes stopped growing. … A one-time gift in this world will not boost anyone’s income permanently. At best it can just help them move up a bit faster, but it cannot change where they are eventually headed.”

In the The Rainforest: The Secret to Building the Next Silicon Valley authors Victor Hwang and Greg Horowitt discuss (page 229) “how trust and normative behavior effect systemic financial returns. When actors in the Rainforest behaved in a way that significantly lowers the cost of doing business together, it shifts the entire [transaction cost] curve. Lowered transaction costs due to trust and social norms make high-risk seed-stage and early-stage venture capital investing more profitable.”



This diagram from the book shows risk adjusted capital in a diversified portfolio (vertical axis) and how reducing transaction costs (moving the cost curve to the left) enables earlier returns to be made, or as Victor and Greg put it “One can literally make more money when people get along better.”

Let me now try to connect these pieces. I will not touch on the controversies of using foreign aid to escape prototype traps; although the effect of reducing transaction costs through Rainforest principles is worth thinking about. Let’s return to the director’s need to escape the ‘positioning trap,’ at the bottom of the S curve, which has not been well studied (actually, I made up the term for this Blog). Carrying out and managing multiple small short-term contracts will normally have higher costs than for a large, long-term, institute/industry R&D project. Furthermore, short-term contracts are likely to produce few additional benefits, such as embarking on entirely new lines of scientific inquiry and improved access to current corporate R&D.

From what we have seen so far, to escape the ‘positioning trap’ the research institute should try to position itself to (1) provide relatively small amounts (compared with expected returns) of internal retained earnings and quickly accessible grant financing to demonstrate to a corporate partner that the institute has the capacity to move beyond proof of concept and early prototype R&D, and (2) reduce transactions costs by increasing trust levels – in fact (1) will help to do so.  Trust building through improved communications will be the subject of a future Innovation Rainforest Blog.

Did applying these solutions help? Yes they did. The institute was able to be more selective about taking on short-term R&D contracts, and was able to obtain large long-term joint corporate R&D contracts yielding substantial income. A combination of retained earnings from other projects, internal budgets, and limited grant support was used to escape the ‘positioning trap.’

Early stage development grants are common but we don’t always think of them in terms of helping to escape the ‘positioning trap.’ By the way, we shouldn’t forget that we also need to deal with what happens when the top of the S or L curves is reached, but as academic papers in mathematics like to say “we will leave this to the interested reader.”

See a paper by Kiminori Matsuyama, On the Mechanics of Poverty Traps, for a discussion of poverty traps in economies from a dynamic (non-static) viewpoint.

Next time: Solving the right problems.

Imperfect works

Notes on the practice of innovation and technology commercialization.

It’s natural for us to seek, if not perfection, at least to try and optimize impacts.  This applies to the collection of components which support effective development ecosystems. For example during the 1990s when countries in Eastern and Central Europe and Central Asia were transitioning to independent nations, many were eager to learn how they could capitalize on what in some cases was their impressive science base. However, the view was frequently expressed that “we cannot make progress on commercializing science and technology until we have clear laws on intellectual property ownership and protection” or “we must wait until we have sufficient investment capital resources.” Fortunately, in Russia for example, many individual scientists and research institutions began to develop procedures and support systems for technology commercialization – even though most of the needed mechanisms were not yet in place, or potentially dangerously unclear; might the government, sometime in the future, claim all rights and revenues from new products or new businesses created from government funded research?

In 2008 Neil F. Johnson, author of the book Simple Complexity wrote a mathematical paper together with Damien Challet with the intriguing title (well, maybe not so for everyone) of Optimal Combinations of Imperfect Objects. Their research shows how to make best use of imperfect objects, such as defective analog and digital components, and how perfect, or near-perfect, devices can be constructed by taking combinations of such defects.

What, one might ask, has this to do with trying to commercialize technology in a developing country or one undergoing a transition from one governmental system to another? Actually, quite a lot. In his book Prof. Johnson tells the story of how sailors used to deduce the correct time at sea, before accurate clocks were invented, by taking a collection of (imperfect timekeeping) clocks on board and averaging their displayed times.

Intellectual property regulations, intelligence about markets and their access, research and development, early-stage funding, new product development experience, transaction costs, culture, trust, incubators, science parks, competence in English language,… are all, like the sailor’s clocks or the defective analog and digital components, imperfect objects. If the cost of perfecting each component, including transaction costs, becomes not worth the effort then stop, use for now, improve later. If no advance towards improving an ecosystem component can be made at the present time, consider making the best of what you have, use for now, improve later. Furthermore, optimized systems also have the disadvantage of tending to be fragile and unstable – but this is a discussion for a future blog

Dave Snowden in his work on complexity believes we are all engaged in a constant process of sense-making; trying to find the best available explanation for something based on previous experience rather than the perfect logical solution.  Snowden contrasts classic efficiency seeking organizational management with organic approaches that can maximize the effectiveness of a system even though its individual component agents may be operating sub-optimally.

Practice continues to demonstrate the effectiveness of this approach. This is one reason why we have ceased using the term ‘best practices’ in favor of ‘good practices.’ So let’s not strive for perfection but be happy with fit-for-purpose – although Miss Dale my kindergarten teacher who always wrote ‘must do better’ on my report card might have frowned.

Next time: Poverty traps and prototypes.