So the folks at ad:tech is helping to solve this rather large problem. Innovation Alley is a new section of the ad:tech exhibit floor that is dedicated to interesting new startups in the advertising technology world. There are plenty of conferences that focus exclusively on technology and web startups but they’re attended largely by people within that world. You rarely find customers at these kinds of startup conferences. Industry conferences for different verticals such as advertising, healthcare, transportation, etc., could take ad:tech’s example and devote space to highlight innovative new startups that would normally not have resources to buy exposure to influentials and decision makers from the industries they’re targeting.

The startups I found most compelling at Innovation Alley were ones that addressed the emerging importance of social media in advertising and marketing. I haven’t watched television for a long time. Most of my friends haven’t as well. Not only do we not see mass market television advertising, we don’t trust it anyway. And while we begin many of our purchases online through search engines, we will increasingly get influenced by our social networks of friends, colleagues and relatives to buy things we hadn’t considered before. This is why Google the Goliath is afraid of David Facebook.

Peerset helps advertisers improve their audience targeting. From what I gathered by talking to some of Peerset’s employees, the company combs through social network profiles to construct anonymized data sets of interests and behaviors. The more you reveal about yourself on your profiles and social status updates, the more you will receive relevant advertising. As much as we’d like to believe that we’re individuals with unique tastes and opinions, we’re very much like the rest of our friends. We are more easily put into a group or several groups that share common characteristics than we believe. What I’d like to see is “data profiling” companies like Peerset and probable competitor Rapleaf use their technology to not only help advertisers serve advertising more accurately but to also just produce more interesting content. Sort of advertising by not advertising. Yes, that’s very vague and unhelpful but I think someone will figure out what I mean.

140 Proof delivers advertising exclusively on Twitter. The company helps brands target the right people in the Twitter universe. This is another example of the increasing importance of social networks and the opportunity to customize messages based on personal, yet public, information. 140 Proof claims that great tweets get retweeted. The retweet function, which was invented by users and not Twitter’s management, is one of the most simple, brilliant, and elegant ways to make a message viral. It would be interesting to get real hard data on how often marketing and advertising messages get retweeted versus “regular” tweets.

Brickfish helps brands create campaigns that get consumers to create user-generated content revolving around the brands. Many startups have tried to accomplish this kind of concept. It’s really difficult. As much as we’re becoming more social, we’re also becoming more cynical or skeptical. Consumers are trained to beware of blatant advertising. We might be even more cautious of blatant attempts to get us to help create still more blatant advertising. I’m sure that Brickfish has encountered resistance in some of their campaigns. Perhaps they’ll figure out how to systematically incent customers to sing the praises of brands. If someone can figure this out, I think they have a big hit.

I’m looking forward to the next ad:tech in New York. I hope they will continue to allow startups onto the show floor through the Innovation Alley program. You expect to see the big guns like Microsoft (MSFT) and Google there. There should be room made for pleasant surprises.

The world would be a much better place if less people tried to build startups. Don’t get me wrong, I’m not saying we could use less entrepreneurship. Innovative entrepreneurs will pull us out of this recession more sustainably and more meaningfully than any government bureaucrat with indirect policy levers could ever do. What I am saying is that we need more people wanting to build companies, not startups. That is not a too subtle distinction.

Would-be entrepreneurs proclaim proudly how they are starting new businesses and are willing to endure many years of blood, sweat, and tears. To be sure, the willingness to work hard and persevere ranks high on the list of essential entrepreneurial character traits, but I think we have over-romanticized the startup life. Low pay/no pay, long hours, and years of struggle have come to be badges of honor for those of us still in the minor leagues of startups. We’ve either frantically adjusted our business models (groping after every hot trend like Web 2.0, social networking, or microblogging) or we’ve stubbornly stuck to our original ideas regardless of market feedback. The most important thing we have in common is that we’ve been unable to graduate to the major leagues of thriving, growing, established companies too big and successful to be called startups.

However you define a startup, trust me, there is no glamor or glory in remaining a startup. But we’ve come to fall in love with the Myth of the Startup. We all know a few guys who seem to perpetually be working on a startup. They love the story of being a startup entrepreneur and the attendant lifestyle. Even more pronounced is the first-time entrepreneur who has bought into the Startup Myth. His romantic vision of startup life becomes a self-fulfilling prophecy and he is destined to struggle with a small “startup” because that’s what he wants.

Dump the warm fuzzies. Entrepreneurship is not about startups. Entrepreneurship is not about eating ramen noodles and scraping by. Entrepreneurship is not about being able to tell your friends and family you are a founder of a startup so you can finally impress them. Entrepreneurship is not about working 12 hour days ad infinitum and sleeping only 4 hours per day to show the world how tough and committed you are. Entrepreneurship is not about attending industry conferences so that you can hear yourself speak and tell your competitors how excited you are about your opportunities. Entrepreneurship is not about blogging about entrepreneurship. Most of all, entrepreneurship is not about some romantic ideal of living a tough startup life.

Get real. Entrepreneurship is about growth and value. Entrepreneurship is about creating something a sufficient number of people want or need. Entrepreneurship is about turning every dollar of resources spent into something worth more than a dollar. Entrepreneurship is about building a company and growing it beyond startup stage. The list of what entrepreneurship is not is much longer than the list of what entrepreneurship is. That’s because there are a lot of things people associate with entrepreneurship that really don’t have anything to do with entrepreneurship. It’s like describing a hamburger. Despite the many different ways to make a hamburger, there are almost infinite ways to describe what a hamburger is not.

Dream, dream big. Think, think different. Start a startup and eat ramen noodles (rice and soy sauce in my case) if you have to. Revel in your foldout tables and chairs. Dance a jig in your cozy garage. But realize that all these are just trappings of a startup. Figure out a way to scale so that your startup can grow to be a valuable company. Build a company, not a startup. If you love the startup lifestyle, leave your company after it outgrows you to start something new again. It’s a good thing to have your company outgrow you, your garage, and your romantic visions of what it means to be an entrepreneur.

Hewlett Packard Garage

Umair Haque’s An Open Challenge to Silicon Valley put it in even stronger terms as he labels the current crop of Web 2.0 startups and their incrementalist approach “trivial” and “banal.” I certainly could see the banality of the Web 2.0 echo chamber. Say a company creates a service for users to share picture slideshows online. The next competitor provides a widget for picture slideshows with better transition effects. Then the next entrant will provide the ability to incorporate simple audio effects into slideshows.

Haque’s answer to “what’s next?” is to challenge revolutionaries or entrepreneurs to solve bigger problems. What are some huge problems facing this world? Haque mentions skyrocketing food prices, unstable financial systems, and a worsening energy crisis. To this list I would add terrorism, a deteriorating and increasingly costly healthcare system, global warming, and war.

Pieter van der Heyden – Sloth

The incrementalism Nolan and Haque decried is alive and well. Petty, self-appointed social networking gurus argue about the incremental virtues of Identi.ca over Twitter, Facebook over Myspace (NWS-A), FriendFeed over Twitter, Twitter over Facebook, and countless other variants of this rock-paper-scissors silliness. The other 99.9% of the world’s population couldn’t care less.

At the time I read Nolan’s and Haque’s posts, I was mired at SocialOptimize creating social networking applications for clients. My former partner and I collected exorbitant dollars per hour for our work but I felt as if we drastically overcharged for our services. I came to realize that what we produced were inconsequential products that added little to no value to the economy and society. Even the companies that employed SocialOptimize derived scant value from the apps we delivered. Don’t get me wrong – I enjoy games and distractions as much as anyone but these apps constituted neither good games nor good distractions. They were merely companies’ halfhearted and “me too!” attempts at having a presence on social networks. The companies didn’t really even want these apps; they just got caught up in all the Web 2.0 hype.

As an investor, I’ve always been a contrarian but my entrepreneurial endeavors started to look like a vapid run with the herd. Haque’s and Nolan’s posts landed profound psychological kicks to my posterior. So I immediately interrupted my usual programming and have since been obsessed with searching for opportunities to address bigger problems.

My search for meaning has turned out to be fortuitous and delightful. It has taken me many months as I tried to vigorously filter noise from signal, short-term cash grabs from sustainable opportunities. Opportunities never appear scarce; the trick lies in carefully identifying and selecting the ones I can have the most impact on and the most fun with.

So I was ecstatic when I decided to join Design Engine Lab, a leading industrial design firm, as partner and chief strategist. Industrial design is an entirely new world to me and I’ve jumped in with complete enthusiasm. I am steering the firm gradually away from servicing clients and toward developing our own internal products and spin-off companies.

We have designed a new, patented interface technology that we will first apply to the lighting market. Our technology has the potential to curb energy usage drastically wherever it is installed. Some of Haque’s big problems are beyond the scope of my circle of competence, but global warming is one which Design Engine Lab’s greener and cleaner technology can have a very positive impact. Our technology will also affect the delivery and efficacy of healthcare, another big problem, by mitigating the environmental risk factors attendant in hospitals and other healthcare facilities. Our technology will be used in hospitals across the United States and that specific segment alone represents a multi-million dollar market.

We’re also forming a joint venture with another company to develop a portable landing zone that will dramatically improve the success rate of emergency extractions of injured people via helicopter. I’ve accompanied helicopter pilots on test flights and have received nothing but the most eager feedback. I’m very excited about this product because it will actually save lives in the real world.

At Design Engine Lab, we conduct serious play looking for ideas that have global implications. Sometimes, that means huge ideas requiring complex execution. But we also engage in what I coined Bite-Sized Innovation®. Small does not have to mean incremental if the result is drastic. We attempt to make small changes that lever up to create huge consequences. Some of our upcoming medical device projects will reflect this Bite-Sized Innovation model. The best part of all this is the intensely joyful feeling of play that permeates all our brainstorming and experimentation sessions.

I don’t want to stray too far from the software world. So I’ve been fortunate to have also gotten involved with Sendside Networks as a consultant helping with research, marketing, business development, and fundraising. Sendside is creating technology that will change the way companies communicate with their customers. It is a highly risky strategy as we are trying to forge a brand new category in the Enterprise 2.0 market. But highly risky strategies are the ones that capture or create enormous value if executed well. In this case, the risk is vastly mitigated by a fantastic executive team and boards of directors and advisers filled with quality individuals. The team is the primary reason I wanted to get involved in the first place.

Without giving away the recipe for the secret sauce, Sendside has the potential to replace a sizable portion of the physical mail stream. In our vision, at its most revolutionary extreme, only junk mail and parcels will flow through the mail stream. Successfully bringing about this vision would make Sendside one of the greenest companies in the world, lightening the global burden on our forest lands forever. I have to give a shout out and thank my friend Jeff Barson, Sendside’s evangelist, for turning me on to this opportunity.

I’ve been lucky to have had the luxury of putting a halt to my daily grind to look for game-changing opportunities. I was especially lucky to have come across the two thought-provoking and ego-shattering pieces by Haque and Nolan. Umair Haque wrote in the end of his post that he’d put his money where his mouth is and advise five organizations trying to solve big problems. Umair, if you’re reading this, please get in touch with me. If not, I’ll be in touch shortly.

When Microsoft (MSFT) bought a small stake in the wildly popular social network, the price paid implied an overall value of $15 billion. The rumored prices at which Facebook insiders are trying to unload some shares carry an implied overall value of as low as $3.75 billion to $5 billion.

It is clear that Facebook currently cannot be worth $15 billion. The Facebook Apps platform that attracted so much attention from independent software developers has lost a lot of momentum. Independent developers who invested a lot of time, money, and energy into creating Facebook Apps have found it increasingly difficult to attract a significant audience. While finding users has been tough, monetizing their creation has proven to be a Herculean task. Special venture funds created to fund Facebook apps have not been able to deploy much of their capital as most Facebook apps are ill-conceived or frivolous with no clear business model. I would return that money to limited partners rather than hope a genius comes along to battle for market share owned by early movers like Slide and RockYou!

Advertising, the main business model of free social networking platforms, continues to disappoint, with click-through rates and conversion rates declining alarmingly. While international growth remains strong, domestic growth is decelerating noticeably. This could be spun as a positive, but I don’t think the youth of other countries have spending power approaching anywhere near that of American youth.

Will this mark the end of the current cycle of funding exuberance on the part of venture capital firms for all things Web 2.0 or social? The pace of venture funding in this sector of the Internet really picked up when Myspace sold for close to $600 million to News Corporation (NWS-A). Since then, millions have been poured into all flavors of social networks and social networking apps. It reminded me of the fin de siècle bubble that burst so painfully for all involved. Below is an essay I wrote for an investment letter published in June 2007 distributed high net worth clients.

Irrational Exuberance 2.0

We are not calling a bust of the current bull market. As much as we admire Barron’s editor Alan Abelson’s wit and literary style, we are cognizant of the ravages that might befall our track record if we were permanent bears. Still, we can’t help but imitate his dour tone of the 1990s when he repeatedly called too early for the bursting of the dot com bubble. Mr. Abelson eventually got it right when we entered the new century and collectively blinked at the stratospheric levels we had taken the market to. Then as now, venture capital funding of cockamamie business ideas served as a reliable indicator of an impending rinsing out of “frothiness.”

As we once again witness new highs in the stock market, it may be wise to examine the shenanigans our friends in the venture capital world are participating in. Are they helping to start companies “built to last” or are they throwing money at silly business ideas “built to be sold?” After a quick survey of recent startup financings, we think a strong sense of déjà vu might visit us.

While yesteryear’s absurd venture deals were justified as the obsolescing of brick and mortar business models by an online nirvana fueled by UPS (UPS) and FedEx (FDX) trucks, today’s venture activity centers around “social networking” and the wisdom and power of crowds, also known as Web 2.0 in geeky circles.

Take NaturallyCurly.com for example. It proclaims itself as the social network for people with curly hair. Purportedly, individuals with curly locks need an online support network for all their hair maintenance difficulties. Don’t forget the most important feature of any social networking community, the ability to make friends with similar interests. We delight at the prospect of spending all our time discussing hair. A technology industry veteran who sold his company to Compaq invested $600,000 into this dandy of a site.

A little less silly but nonetheless vacuous is a website called Flixster. This is the social network for all things cinematic. Users rate movies, join fan clubs celebrating famous thespians, read up on news regarding upcoming films, and make friends.

Websites that allow people to rate movies and chat about their favorite scenes already exist. They just don’t allow people to make friends. This ability to make online friends convinced Lightspeed Ventures, a very reputable venture capital firm, to invest around $2 million into Flixster.

If the dollar amounts involved look nothing like the wasted mega-millions of the late 1990s, we present Geni.com, a website for constructing family trees. The premise revolves around getting relatives to help by emailing them a digital “widget” with which they could plug themselves in the appropriate branch of the family tree. It is the wisdom of crowds, albeit a familial one here, that makes this a very compelling idea indeed. Unfortunately, it occurred to us that great great great grandpa Bob of many years before cannot respond by email from Heaven. That did not prevent Charles River Ventures from injecting $10 million for 10% of the company, effectively valuing the then seven week old company without any revenues at $100 million. We believe the large valuation might have something to do with being able to turn relatives into online friends.

The Big Bang that gave rise to all this Web 2.0 insanity occurred when Rupert Murdoch’s News Corporation bought the top dog of all social networks, Myspace, for $580 million. Users of Myspace could create their own web pages and browse around the online community to make friends. Google (GOOG) soon followed by buying YouTube for $1.6 billion. YouTube users upload their homemade videos for the whole world to watch. One of the key principles of Web 2.0 is getting the community to contribute user-created content. Did we mention that YouTube users could also make friends with fellow wannabe Spielbergs?

Almost overnight, lemming-like venture capitalists funded dozens of Myspace clones with typically cute techie names like Tagworld, Bebo (TWX), Facebook, Facebox, Multiply, and Gather. Of course, all of these allow users to make friends.

YouTube copycats receiving venture funding include Veotag, Kyte, Mogulus, VideoJug, YeboTV, and Brightcove. Although we haven’t used these sites personally, we’re quite sure you could make friends on all these websites. How many News Corporations and Googles remain to stuff the coffers of venture firms by buying their portfolio companies? It seems as if entrepreneurs and venture capitalists in this space are banking on many more buyouts to come.

It isn’t just the private venture capital world that has fallen to the seduction of easy profits. When flimsy businesses with short operational histories try to tap the capital markets by going public through an initial public offering and find a receptive market, we are treated to such delicious examples as GoFish (GOFHE.OB) , a video sharing website in the spirit of YouTube. Debuting last October on the over-the-counter “bulletin boards”, the fishy company achieved a peak market cap of $147 million. With only $45,580 in revenue and no profits to speak of, investors in GoFish are swimming in a foamy sea of hope and greed.

Our favorite new social network? Stockalicious, a website that allows users to keep track of their portfolios and compare their performances against the market and each other. We wonder if Alan Abelson might jump on the Web 2.0 bandwagon and become a member of this Internet community. We could sure use a friend or two.

Last week, I attended Zions Bank’s (ZION) 7th Annual International Trade and Business Conference. Most of the speakers were very interesting. John Howard, the former Prime Minister of Australia, gave a lively keynote speech and subsequently fended off with aplomb the inane question of a clearly wide-eyed political science student from the university. Christopher Padilla, the United States Under Secretary of Commerce for International Trade (that’s a mouthful), spoke about the opportunities in a world featuring an emerging power in China.

The one speaker that intrigued me most was Matthew Simmons of Simmons & Company International. He spoke about “peak oil” and a world vastly transformed by the essential “drying up” of oil fields in Saudi Arabia in particular and the world in general. In a world of peak oil, we would not travel as much. Everything becomes more expensive because everything is less accessible and less transportable. New political and cultural shifts will take place that will reshape the globe as we know it. Simmon’s book, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, which Zions was handing out free at the tables, is a sobering argument for why oil prices are so expensive right now. Of course, Simmons is an investment banker to the energy industry so everything he says must be taken with a grain of salt. For that matter, anything anyone says should be taken with a grain of salt. Always consider the incentives of the messenger.

Nevertheless, crude oil cooperatively jumped nearly 5% last week. Over the past year, black gold has doubled in price. Traders cite the falling dollar as one major driver of escalating spot prices, but Simmons would argue that exogenous factors such as foreign exchange rates assert much less influence than long term shortages of oil.

Two weeks ago, the markets turned in a defiantly strong performance. Equities in particular were bought up furiously by institutions like the latest Grand Theft Auto installment. Everyone loves a bull market and only the most strident bears and short sellers could lament upwardly trending indexes. But the economic indicators were still trickling out rather bleakly and thus I reasoned that the rally was overdone. The equity markets proceeded to give back all their gains and then some last week. Luck was a lady last week.

Macro

Back to oil. In the face of oil’s ascent, I dubbed our current era the Black Bubble. I attributed a good portion of crude’s rise to the influx of speculators and momentum investors/traders looking to ride the bubble to even frothier levels. It isn’t easy to make a contrarian call, so it was with great relief to find that George Soros, the billionaire hedge fund trader, philosophical political activist, and philanthropist, recently spoke of an oil bubble. He’s certainly a lot better at extracting alpha from the market than I am.

“Speculation… is increasingly affecting the price,” he said. “The price has this parabolic shape which is characteristic of bubbles,” he said.

The comments are significant, not only because Mr Soros is the world’s most prominent hedge fund investor but also because many experts have claimed speculation is only a minor factor affecting crude prices.

However, Mr Soros warned that the oil bubble would not burst until both the US and Britain were in recession, after which prices could fall dramatically.

Mr Soros also warned that the Bank’s inflation report represents a “Faustian pact”, obliging it to keep interest rates high to control inflation, even as the economy is starting to slump.

He said: “The dislocations will be greater [than in the 1970s] because you also have the implications of the house price decline, which you didn’t have in the 1970s.”

Soros is speaking of the Bank of England here, but that is essentially the same “rock and a hard place” I expected Ben Bernanke and our own Federal Reserve would have to contend with. Not only is oil a key component of rising inflation, but food is the twin prong in the vice that is squeezing the consumer’s wallet.

The government likes to exclude oil and food from “core” inflation measurements. It is as if the pinheaded bureaucrats don’t think people buy food and oil. The last time I checked, food and oil are both very “core” elements of our budgets and lives.

So indeed, I believe we are in a Black Bubble. George Soros would know better how to express that outlook with an optimal trade. I’m much more of a long term investor and quite incompetent at finding the optimal trading vehicle.

Micro

Grand Theft Auto IV on Track to Set New Sales Records – Take-Two Interactive Software (TTWO), the publisher of GTA IV, is currently being courted by the much bigger Electronic Arts (ERTS). According to some reports, GTA IV will pass Microsoft’s (MSFT) Halo 3 as the best selling console video game of all time. Seems to me there is no GTA fatigue despite many different installments since the “game-changing” GTA III. Also seems to me that TTWO ought to hold out like Yahoo! (YHOO) for a higher price.

Travel Appears To Be Next Up For Google – Travelzoo (TZOO) has been a fashionable pick by some value investors. What’s not to like? The company essentially traffics in information, one of the most scalable and profitable business models ever invented by man. The company has healthy margins and return on equity (ROE), an unencumbered balance sheet, and a flock of short sellers ready to be squeezed. Heavy insider buying adds a cherry on top. But something wicked this way comes; Google (GOOG) is expected to extend its tentacles into the online travel information industry.

Mindray Medical: Strong Report and Fast Growth – Mindray Medical (MR), one of the leading medical device companies in China continues to hum along with breathtaking growth. More than half of the company’s revenues come from outside of the Middle Kingdom, but the recent humanitarian disasters brought on by earthquakes and aftershocks may send demand skyrocketing in the homeland.

A Wrench In The Machine? – Conventional wisdom says the United States is losing its manufacturing sector. Mostly true. Badger Meter (BMI) is one of the few companies thriving as a manufacturer of specialized industrial equipment. BMI makes water, oil, and fluid meters. ESCO Technologies (ESE) competes directly against Badger Meter in pushing the next generation of networked utility meters that will eliminate the need for the local utility company to send a technician out to read your water meter. Full Disclosure: I currently have a long or short position in BMI in one or more of my private investment partnerships.

Blackboard Application on Facebook – Having operated Web startups involved in the social networking space for over 3 years, most news items involving Facebook or Myspace (NWS-A) usually register a blah on the blah-bam scale. The new Facebook application by Blackboard (BBBB) is a bam. This web application will not change Blackboard’s fortunes much, but the idea that social networks, unlike the banal uses self-proclaimed social networking gurus foist on unsuspecting clients, can actually be used to facilitate something robust sends chills up and down my spine. The megatrend of online education cries for an intelligent implementation of an educational social network.

Natus Medical prices public offering of 4M shares – Shareholders reacted allergically to Natus Medical’s (BABY) registration of secondary offering shares. Turns out demand for the secondary offering was stronger than expected and the company’s stock rebounded. Natus Medical’s recent acquisitions make sense. Company management has shown an ability to allocate capital intelligently. The capital raised through the secondary offering will allow the company to bolster its competitive position as weaker competitors exit the industry by selling. Full Disclosure: I currently have a long or short position in BABY in one or more of my private investment partnerships.

A few days ago, I wrote about the commoditization of social networks or rather the social networking feature sets that currently make Myspace and Facebook so unique and neat. Pioneers in social networking like Friendster and Myspace introduced a new data and software architecture that, at the same time clumsily and elegantly, met Internet users’ desire to interact and share content with each other. Finding old friends, connecting with new friends, sharing music and videos, playing collaborative games, and expressing oneself to virtual audiences of thousands all were groundbreaking features or functions that captivated a whole new generation of Web users.

These features generated higher levels of engagement (or stickiness) many times greater than traditional web properties. This stickiness in turn attracted marketers and advertisers who wanted to be where the people were. This stickiness premium netted the founders of social networking startups wealth reminiscent of the dotcom bubble. Myspace sold for nearly $600 million in a buyout by News Corporation (NWS-A), Facebook was valued at $15 billion by Microsoft (MSFT), and Bebo’s owners sold out to AOL (TWX) for $850 million.

With great rewards come hordes of wannabes and copycats. Many people are staking their future on social networking. Some are attempting to create me-too social networks. Others are pimping themselves as “experts” in social networking and offering their “consulting” services. I did the same with my SocialOptimize startup. Although my now defunct startup was able to deliver good social networking applications to prominent venture-funded startups, I soon realized that social networking would become a game with few winners and many losers. I argued that once Web 2.0 methodologies become widely adopted and social networks become a feature set rather than destinations, those same Web 2.0 methods will become standardized commodities.

That march to commoditization may occur faster than anticipated. Google (GOOG) recently announced its Friend Connect program, which allows virtually any website to plug in a turnkey social networking suite. Owners of websites can, like Google’s AdSense product, embed a snippet of code in their webpages and immediately enjoy the benefits of offering social networking features to their site customers or visitors. Think of Google Friend Connect as a more powerful Google AdSense, but instead of offering relevant text ads it offers your site visitors the ability to connect with their friends, connect with new friends, interact with each other with messages, and share content.

Here are the search engine giant’s stated high-order benefits of Google Friend Connect (GFC):

• Anyone with a basic understanding of the Web can implement GFC, no need to hire an expensive programmer or self-branded “social media guru.”
• Drive traffic: people who discover interesting sites can bring their friends with them, and can opt-in to publish their activities on those sites back into their social network, attracting even more visitors.
• Increase engagement: access to friends and OpenSocial applications provides more interesting content and richer social experiences.
• Less work: any site can have social components without hiring a programming team or becoming a social network.

That last point is key. Google doesn’t want more “social networks” per se – it just wants more websites to have social features. A while ago, it signed a deal with Myspace to serve Google ads. At the time, Google paid a huge premium and there are reports that claim the Mountain View, CA behemoth has not recouped its cost. Signing advertising deals with mass market social networks can be expensive. Helping mom and pop sites to have social networking features will, in the long run, give Google a cheaper alternative. Google is simply facilitating the creation of more web pages (places to serve its ubiquitous ads), pageviews, and advertising inventory.

The message is clear. You don’t need to become a social network; social networking features are a commodity. Here, have a few social networking features for free.

The market takes a breather after several weeks of blistering recovery from last winter’s doldrums. Commodities all around saw amazing advances. Crude oil rose 8.3% last week and has more than doubled over the last year. I remember taking my first car, a Honda (HMC) Civic, out for the first time and pumping gas for about $1.18 per gallon. This was also in the notoriously gas-expensive San Francisco Bay Area. Base commodities and gold continue to follow oil’s lead in going the opposite direction of the U.S. dollar. Will the likely Democratic presidency mean a material difference to the nation’s budget policies and thus the value of our currency?

The tech-laden Nasdaq Composite took a 1.3% dive last week. Does this in any way validate my technology industry bifurcation thesis? Absolutely not. Relative to the rest of the equity markets, the Nasdaq Composite performed decently. The S&P 500 stock index saw a 1.8% decline while the Dow Jones Industrial Average (a poorly constructed index) lost 2.4% over the last week. More painfully for investors anticipating a real estate recovery, REIT stocks lost 3.2% collectively. The Nasdaq Composite (actually a very well constructed index) performed better than other equity indexes. In essence, technology stocks as a whole, large blue chips and second tier small caps, did better than the old industrial giants found in the DJIA and the big caps in the S&P 500 by a significant margin.

We have seen very little evidence of second-tier technology companies suffering from the recent slowdown in economic activity. This is particularly interesting because one of the historic catalysts for technology capital investment by enterprises, the Microsoft (MSFT) operating system upgrade cycle, is not a large factor in this market. The Vista operating system has not caught fire like previous Microsoft operating system launches. The Windows XP operating system was a blockbuster and so were earlier versions of Windows. Prior upgrading cycles resulted in renewed investment in computer equipment, computer peripherals, and secondary software products.

Macro

I’ve alluded to my concern about Ben Bernanke’s ability to display great staying power in his effort to jump start the economy by lowering interest rates. With oil and commodity prices barreling higher every week, the specter of inflation looms menacingly and hampers the Federal Reserve’s ability to continue lowering rates. The macro themes of globalization and emerging giants like China and India have been the drivers of skyrocketing prices in oil and food commodities.

However, I see imbalances developing between asset prices and the underlying supply and demand curves. Crude oil’s meteoric rise to record prices never before seen in history is rooted primarily in fundamental, systemic growth in demand. But the recent, almost parabolic rise in oil prices suggests that speculators and trend followers are piling in, hoping for continued profits flowing. Speculators and trend followers, by definition, introduce inefficiencies and imbalances to asset prices. China’s trade surplus is growing at a decelerating pace. Our diminished dollar makes our goods and services much more attractive to foreign consumers. It also makes foreign goods and services much more expensive for Americans to buy. The trade frictions caused by our historically cheap dollar might just slow down emerging markets growth and thus the demand for oil. Oil is the hot investment right now, but it could be flammable for recent riders of the bandwagon. We might be caught in what I call the “Black Bubble.”

Micro

Priceline surges on strong earnings, outlook – Priceline.com (PCLN) hit an eight-year high as both its domestic and international businesses enjoy huge demand. The company’s business model, which allows travelers to name their own prices or bids, has been attracting legions of bargain-hunting travelers. How long will this last? Priceline.com is one of the few companies thriving in the travel industry. The airlines, other online travel retailers or portals, and car rental companies have mostly seen their stocks decline over the last year.

Constant Contact’s first quarter revenue soars – Email marketing is so Web 1.0, isn’t it? Older Internet users still rely heavily on email. Early adopters and younger users of the Internet are less reliant on email. Instead, they gravitate to other services such as instant messaging, text messaging, and social networking. Twitter, is a very interesting next generation platform that further reduces the need for email communication. All these usage patterns do not bode well for Constant Contact (CTCT), a provider of software for email marketing campaigns.

The CAPS Screen: 10 Small Caps on Fire – The Motley Fool includes Interactive Intelligence (ININ) in one of their interesting screening exercises. Interactive Intelligence makes software that manages call center or contact center operations. Screens are a good way to generate investment ideas, but a formulaic investment program based on screened variables does not automatically lead to good investments. Many investors employ screens to find stocks selling cheaply. Sometimes, companies are cheap because they deserve to be cheap as the economic merits of their businesses deteriorate. An investment decision made solely by screening and without knowledge of the competitive standing of the company in question is akin to marrying a girl solely because she comes from a good family. Full Disclosure: I currently have a long or short position in ININ in one or more of my private investment partnerships.

National Oilwell Varco, Inc. Q1 2008 Earnings Call Transcript – I mentioned that oil appears to have become a speculative market surrounded by a thin film of soapy substance. Bubbles don’t fizzle out, they usually burst or pop with ferocious force. National Oilwell Varco (NOV) provides equipment and supplies to the oil and gas industries and has been a big beneficiary of the rising price of crude. The price of oil may continue its amazing ascent or it may flush out the speculative latecomers, but the imperative to keep searching and producing oil will hardly diminish.

James River Coal 1Q loss widens on higher costs, stoppage – Alternatives to oil become more attractive as black gold becomes more expensive. Thus, oil shale, ethanol, coal, solar power, and biofuels become serious considerations. I have been investing with this thesis for over a year. James River Coal (JRCC), one of the worst managed coal companies around, has seen its stock move in lockstep with the rising price of oil. So although it continues to run into management and operating gaffes, the stock market has rewarded it and its highly leveraged balance sheet with new price highs. Full Disclosure: I currently have a long or short position in JRCC in one or more of my private investment partnerships.

First, Anderson argues that social networking should be a feature, not a destination. I agree wholeheartedly. The ability to interact with friends, share content, and engage in self-expression should be standard features on most websites. The unique methods of encouraging creative online behaviors known as Web 2.0 will filter through the rest of the Internet and, soon, your grandfather’s favorite website will allow him to engage in “social networking.”

Second, Anderson cites stats regarding advertising revenues or costs from Myspace (NWS-A), Facebook, and Ning. He shows that monolithic social networks like Myspace and Facebook, which attempt to be all things to all people, are having immense struggles with selling advertising at worthwhile rates. He also implies that Ning’s niche vertical social networks built by customers command higher advertising rates. Some marketers happily pay the higher rates because the engagement level is greater on these niche vertical networks. Advertisers also prefer the more intelligent targeting of relevant audiences. Myspace, Facebook, Bebo (TWX), and other undifferentiated mass networks are actively trying to improve their targeting abilities so it will be interesting to watch this competition evolve.

Finally, Anderson asks a pointed question about Facebook’s implied $15 billion valuation when Microsoft (MSFT) bought a small percentage of the company a few months ago. If Facebook is struggling to target its advertising and improve its advertising revenues, does its gargantuan valuation make sense? I think Zuckerberg should take the money and run. I also think that Lee Lorenzen, a venture capitalist, and his prediction that Facebook is worth $100 billion is a case of shrewd exaggeration. What I think is most funny is the fact that all of Lorenzen’s fanboys, the self-branded “social app gurus” and developers of tiny Facebook apps are all eagerly drinking the spiked punch. There are few better examples of confirmation bias in action.

My main problem with Anderson’s analysis is his implied assumption that the currently high advertising rates the niche vertical social networks enjoy will stay relatively high. Based on his personal experience, he concludes that Ning’s advertising rates are greater than Facebook’s and Myspace by at least a factor of ten. I don’t think this will last. Web 2.0 methods are precisely that, methods. They can be products, but they are also methods or general, conceptual best practices. As such, the ability to create robust social networks for different verticals will diffuse to a critical mass of software engineers. As that process accelerates, social networks and features of social networking will become commonplace or commoditized. I’ve alluded to the commoditization of social networking applications, which is a related problem. When this process nears its peak, advertising rates for all social networks will have diminished drastically. Self-proclaimed “social app gurus” and “social network gurus” who have staked their futures on social networking will ultimately prove themselves as less than prudent.

When critical mass is achieved, the eagerly welcomed venture capital that forms to service innovative startups becomes a hot topic of conversation. Networking groups begin to get together to talk about how to raise money from venture capitalists. “Consultants” come out of the woodwork claiming expertise in helping new companies attract venture capital. Venture capitalists are looked upon as “masters of the universe” and treated like rock stars. University business school programs institute curricula aimed at instilling students with an understanding for the process. MBA grads and finance majors from those same university business schools decide they want to become venture capitalists. Local business magazines hyperventilate upon the sexy subject. Entrepreneurs talk in awed tones about their peers who have successfully attracted funding. Angel groups form and hold workshops or seminars about the process of fundraising. Websites with glossaries of mysterious VC lingo spring up out of nowhere.

We have glamorized venture capital beyond reasonableness. We spend an inordinate amount of time, energy, and attention on the subject of venture capital and end up mythologizing it. Because we talk about it so much – in such reverent tones – entrepreneurs unfortunately fixate on it at the expense of other critical components to building great companies. Would-be entrepreneurs start to reason that they must get venture funding in order to “really do something.” It is a convenient excuse to do nothing. Because we talk about venture capital so much, some of us start to see raising capital as the ultimate measure of success. “If I could just raise one million dollars, things would be different.”

Can we talk less about venture capital and more about great ideas and business building? Sure there are some programs that mix in subjects like building a great management team, hiring best practices, networking and relationship building, but venture capital gets the overwhelming majority of attention. What we need more of are entrepreneurs with the ability to figure out if their pet idea is something worth pursuing. At the very least, we need workshops and seminars that help entrepreneurs figure out if their idea, frankly, sucks. We need to talk more about making sure that our ideas are unique and bring some sort of new value to the world. We need to talk about how to execute better than your best competitor. We need entrepreneurs that can focus on the essentials of building great companies.

What entrepreneurs ought to realize is that venture capital follows true innovation and execution. It goes where the action is. It does not precede the action. Entrepreneurs who are willing to put the work in to become savvy about the whole process will come to understand that raising venture capital is relatively easy when compared to out-thinking and outrunning your best competition. It is much easier than keeping customers ecstatic. Raising venture capital is immensely easier than finding and acquiring the scarcest resource of all, great talent. Raising venture capital is not the end game. We need to stop perpetuating the myth.

“@kevinrose how do I get you to follow me back???” – anonymous self-proclaimed “social app guru”

This is Part 2 of a series that explores the science of Social Media Measurement. Let me preface this post by saying that this is a lighthearted post trying to come up with a simple measurement regarding a hugely successful social web service.

Previously, I explored the measurement of popularity, novelty, and attention on the very popular crowdsourcing news aggregation site Digg. My post was based on an arcane academic study involving the half-life of popularly “dugg” items. It turns out that stories frantically “dugg” by Digg members that make it to the coveted front page have a half-life of only 69 minutes. That’s a lot of work for a relatively short period of attention. Having that knowledge should prove useful to some marketers.

Why do we want to be able to measure social media? Why should we attempt to develop metrics? The ability to measure our efforts gives us valuable information to guide changes or course adjustments. It gives us baseline comparisons to measure against. It allows us to set measurable goals. It also helps us to make decisions when considering outside consulting help. In the social media space, there is a preponderance of self-styled “social media gurus” or “social app gurus” who try to trade off of non-existent influence. Like snake oil salesmen, they make grand claims about their reputation and expertise but their products or services are essentially worthless. Perhaps a few hard measurements could help marketers and advertisers identify the frauds from the really reputable experts.

This time around, I’d like to keep it a little lighter with a simple measurement I came up with to measure that amorphous quality called influence. This is a light-hearted attempt and nothing nearing the scientific exactitude I cited in my previous post. I consider influence as much more important than popularity, novelty, or attention. Indeed, influence implies popularity and attention. More specifically, I’m measuring influence on the hugely popular Web service known as Twitter. Twitter is a micro-blogging or mobile blogging service that essentially asks the question, “What are you doing right now?” When used correctly, it can be a helpful service for networking, sharing ideas, and staying abreast of buzz.

Twitter’s format is conducive to understanding and measuring influence because of its reciprocal structure of “follows” that makes for easy measurement. You can elect to “follow” other members of the Twitter service. Every time someone you are following “tweets” about something, you will get that update on your cell phone. People who elect to follow you are “followers.” Your followers get an update every time you twitter about what you’re doing or thinking.

Initially, most people “follow” their friends and family but eventually move to following other people on the Twitter network. Implicitly, people follow each other because they find each other interesting. I wouldn’t want to be following someone who is telling me and the whole world, “I’m going to the bathroom.”

There is a small group of highly influential members of Twitter that are so interesting and have such important thoughts to share that they quickly draw a whole army of “followers.” Their follower bases grow organically, naturally, and virally because they add a lot of value to the network and their followers. They don’t need to actively campaign for followers. Not surprisingly, their follower base is much larger than the number of people they follow.

There is also a larger group of sycophantic, self-branded “social media gurus” or “social app gurus” that have very little actual influence. We all know a few of these “leaches” and if they weren’t so spammy, they’d actually be mildly amusing. They are actively trying to get more followers. They spend a lot of time in self-promotion mode. They kiss your butt and play nice so that you might decide to follow them. They trade “follows” like high schoolers in a popularity contest. So instead of “I’ll vote you for best looking if you vote me for most popular,” they say “I’m following you so will you please follow me too?”

Not all “social media gurus” are frauds. However, you can spot the ones that are frauds when they try to build their follower base by asking truly influential Twitter members questions like this, “@kevinrose how do I get you to follow me back???” This is one case of a self-proclaimed “social app guru” asking Kevin Rose, the founder of Digg and a member of Twitter, to follow him. How inane is this? Please get a life.

So let’s get right into the Twitter Influence Ratio. It’s very simple really and very similar to the price to earnings or PE Ratio found in stock investing. In the financial PE Ratio – you get an idea of how much in earnings you getting for every dollar you pay for the stock. It’s a nice, convenient measure of how much value you’re getting or your bang for the buck.

Stock Price / Earnings = PE Ratio

EMC Corporation: 15.56 / 0.77 = 20.21

In the above example, EMC Corporation (EMC), a data storage company, saw its stock close at a price of $15.56 for the day. During the last twelve months, EMC earned $0.77 per share. Dividing $15.56 by 77 cents gets you a PE Ratio of about 20.21 – pretty simple right? Essentially, what the PE Ratio tells you is that for EMC Corporation stock, you are paying approximately $20.21 for every one dollar of earnings. Like I said, bang for your buck.

With the Twitter Influence Ratio, we’re going to try and get a read on someone’s true influence level. It stands to reason that if you are interesting, have neat thoughts, and add value to the network, people will naturally gravitate to you and “follow you.” Some of the most influential members of Twitter have many more followers than people they follow. So the Twitter Influence Ratio will attempt to express this relationship as;

Followers / Following = Twitter Influence Ratio

Example: 533 / 609 = 0.875

In the above example, one such self-branded “social app guru” has 533 followers and is following 609 others. This gives him a Twitter Influence Ratio of only 0.875 which means this person is not very influential. Intuitively, you ought to have more followers interested in what you have to say than the number of people you’re following. One might say that 533 followers is nothing to sneeze at. I agree, but the fact that this person has so many followers and is following so many more makes it highly probable that he is what is known as a “friend whore” or “follow whore.” Like the desperate high schooler, he’s just trading votes. Someone with a TI Ratio of less than 1 but is only following 30 others is probably not out there actively trading votes or follows. If I were looking for a consultant, I would run away from this guy and find someone more influential.

Let’s take a look at some folks who are truly influential. The aforementioned Kevin Rose, founder of Digg, is one of the most influential members of Twitter. As of this writing, he has a Twitter Influence Ratio of:

18,416 / 72 = 255.77

The Twitter Influence Ratio attempts to give you a sense of how influential someone is. In Kevin Rose’s case, for every one person he follows, he has just over 255 persons following him.

Justine Ezarik, or iJustine, a talented web designer is another influential member of Twitter:

12,652 / 1,047 = 12.084 Twitter Influence Ratio for iJustine

Of course, the TI Ratio doesn’t always work. If I claimed that it did always work, you could peg me as one of those phony, self-branded “social media gurus.” In the case of Robert Scoble, one of the most influential journalists and bloggers in the technology industry, he actually has a really low TI Ratio:

20,939 /21,243 = 0.985

Scoble’s a journalist so he has to follow as many people as possible to get the scoop. He is basically following as many people as he has followers. His Twitter Influence Ratio is almost a ratio of 1.

Well, there you go, the Twitter Influence Ratio is not a perfect measure of influence. But it does give you a sense of who is truly influential and who is just pretending. OK, this will probably be the last time you here me talk about the Twitter Influence Ratio. Tell that “social media guru” or “social app guru” you know to stop his Twitter spam before you “unfollow” him!

Update: I just found someone, Andreas Gohr, who wrote a script to tell you if someone on Twitter is likely to be a spammer. It’s based on the same principles as the Twitter Influence Ratio and is very well thought out. It helps classify users on Twitter in these categories: Newbie or Social Climber, Twitter Spammer, Twitter Caster, Notable, and Socially Healthy. Good stuff. My friend, the “social app guru” is definitely a Twitter Spammer.