On The Information and How We Operate

I wanted to share some thoughts about Paul Graham’s allegations that he was misquoted and misled in this recent interview in the Information. Our readers are very smart and I’m happy for everyone to have all the information and for Mr. Graham to continue writing about the topic. We’ve apologized to Mr. Graham for any confusion surrounding how his interview would be used. We do not want sources to feel surprised, which is why we communicated with him in advance. But we stand by our process, which I want to share here. We obsess over editorial fairness, transparency and trust and will always do so.

In our interview, which was explicitly introduced as an edited transcript, we made edits for clarity and length. This has long been a standard practice among journalists in the rare instances that they publish extended Q&As, because raw transcripts are messy and hard to read. Journalism inevitably involves making decisions about what to include and what not to include.

We edited a bit around some of Mr. Graham’s quotes on female founders. Specifically, we edited a “these” from the quote. The reason was simple. The “these” didn’t refer to anything. The paragraph that preceded it referred to Mark Zuckerberg being a hacker and it immediately followed a question about what would be lost if YC encouraged more women to be startup founders.

Here’s the relevant bit from the raw transcript. For those of you very interested in this, the full section on women is at the end of this post. 

Eric: If there was just the pro-activity line of attack, if it was like, “OK, yes, women aren’t set up to be startup founders at the level we want.” What would be lost if Y Combinator was more proactive about it? About lowering standards or something like that? Or recruiting women or something, like any of those options?

Paul: No, the problem is these women are not by the time get to 23… Like Mark Zuckerberg starts programming, starts messing about with computers when he’s like 10 or whatever. By the time he’s starting Facebook he’s a hacker, and so he looks at the world through hacker eyes. That’s what causes him to start Facebook. We can’t make these women look at the world through hacker eyes and start Facebook because they haven’t been hacking for the past 10 years.

Mr. Graham has since said the “these” referred to women who aren’t programmers. In our opinion, he didn’t say that to us. We’re happy for him to have clarified to the public.

We know that smart people can disagree and that people can couch our editing, or any editing, as malicious, which is simply bogus. So we updated the story to include the “these” and the context. Writing and reporting involves value judgments about what’s valuable. In many cases “these” is an important word. But in this case, we decided it wasn’t because it didn’t refer to a specific group of women and was in response to a question about women in general. You can read the full context above and decide.

On to the context of the interview:

Mr. Graham’s said that the reason for the interview was for a profile of his wife, which we published. That is true. But it is only half the story.

The on-the-record interview covered significantly more topics than we could include in the profile of Ms. Livingston. It was more than two  hours. Given the unusual length and breadth of the interview, we decided to publish it as a story.

But we didn’t spring it on him. Quite the opposite. We notified Mr. Graham and his PR person and went the extra mile and refreshed their memory on some of the topics. No one expressed any objection. In fact, his PR person followed up with a question about a photo we planned to use for the piece. Mr. Graham didn’t object to anything in the story, or the fact we published it in the first place, until Valleywag wrote about the story days later.

Some people may think we were sneaky. I don’t believe so and believe we specifically took steps to ensure just the opposite. On the record discussions with journalists are exactly that: on the record, meaning the material may be published. It is very common to use parts of older interviews in related stories, sidebars or even stories in the future. At the Wall Street Journal, my colleagues and I would do it all the time. By the same token, plenty of people speak on the record about a topic without knowing in what story the quote might appear. The Information will always go a step further and follow up and let you know when we plan to use the on-the-record comments.

The trust of the public and our subscribers is insanely important to us. Anyone who knows anyone who works at The Information knows that. For those of you who want to know more about how we operate, I want to be clear.  If you talk to The Information on the record we may use that information in different relevant stories. But we will always tell you and give you a chance to comment. We will also bend over backwards to be fair and listen to you, as we have with Mr. Graham, whom we gave our transcript.

By the same token, if you talk to us off the record we’ll never use it.

I know that trustworthiness is the heart of our business and that we have to earn and re-earn it every day. I know that’s even more important as a startup.

Thank you for reading.

The full transcript of Paul Graham on Female Founders

Eric: I want to circle back to women in YC. How much do you think YC needs to be proactive, has any moral obligation to be proactive about this, or anything like that?

Paul: For one thing the number of women is increasing. I think there were a dozen startups with female founders in this batch. It might have been as much as a quarter. I don’t know the exact number. Someone could go and count.

That’s something I’ll probably be asking Jessica [Livingston] more eventually, but yeah.

She’ll have to go count too. There’s a couple of reasons why there are not as many female founders. There’s two questions, “Do we have some problem specifically? This you could identify by looking at the pool of YC startups versus some other comparable pool. I noticed that Andreessen Horowitz, for example, has a page on their site with their seed portfolio which are presumably all companies of similar stages, or at least the time they invested.

I happened to notice because about a quarter of them were from YC, that means three quarters of them are not, it would be interesting to go and see. If you want a pool of startups at similar stages and qualities, it would be interesting to look at that other 75 percent. If you want to know some demographic questions about founders, see what the founders are like at those other startups.

Eric: You haven’t done that?

Paul: No, I only discovered this page a couple of days ago.

Eric: That’s a good idea. I will look at it.

Paul: A lot of people think that we have no way of telling if we have some bias. We do actually, because we go and analyses the people we miss. If the reason we accept few female founders is that we’re biased against them, we would be able to tell this. We would be able to find all these companies we missed.

Like, “Gosh! Half the founders a female,” right? It’s nothing like that. It’s more like one of the founders is female out of all the companies we’ve ever missed. I don’t know for sure, but it’s very few. It’s definitely not the case, that there’s all these good female founded start ups applying to Y Combinator, and we’re throwing them all away. We would know very quickly, if that were the case.

I’m almost certain that we don’t discriminate against female founders because I would know from looking at the ones we missed. You could argue that we should do more, that we should encourage women to start startups. It’s not enough if we merely have…That we should be causing them to start startups and not merely accepting or rejecting them fairly.

The problem with that is I think, at least with technology companies, the people who are really good technology founders have a genuine deep interest in technology. In fact, I’ve heard startups say that they did not like to hire people who had only started programming when they became CS majors in college.

If someone was going to be really good at programming they would have found it own their own. Then if you go look at the bios of successful founders this is invariably the case, they were all hacking on computers at age 13. What that means is the problem is 10 years upstream of us. If we really wanted to fix this problem, what we would have to do is not encourage women to start startups now.

It’s already too late. What we should be doing is somehow changing the middle school computer science curriculum or something like that. God knows what you would do to get 13 year old girls interested in computers. I would have to stop and think about that, because probably…

Eric: The point is that it’s very different from what you guys are doing in the first place.

Paul: You can tell what the pool of potential startup founders looks like. There’s a bunch of ways you can do it. You can go on Google and search for audience photos of PyCon, for example, which is this big Python conference.

That’s a self selected group of people. Anybody who wants to apply can go to that thing. They’re not discriminating for or against anyone. If you want to see what a cross section of programmers looks like, just go look at that or any other conference, doesn’t have to be PyCon specifically.

Or you could look at commits in open source projects. Once again self selected, these people don’t even meet in person. It’s all by email, no one can be intimidated by or feel like an outcast for something like that.

Eric: If there was just the pro-activity line of attack, if it was like, “OK, yes, women aren’t set up to be startup founders at the level we want.” What would be lost if Y Combinator was more proactive about it? About lowering standards or something like that? Or recruiting women or something, like any of those options?

Paul: No, the problem is these women are not by the time get to 23…Like Mark Zuckerberg starts programming, starts messing about with computers when he’s like 10 or whatever. By the time he’s starting Facebook he’s a hacker, and so he looks at the world through hacker eyes. That’s what causes him to start Facebook.

We can’t make these women look at the world through hacker eyes and start Facebook because they haven’t been hacking for the past 10 years.

Eric: What you’re saying is that they’re not out there to be found?

Paul: I don’t think so. I don’t think so. It is changing a bit because it’s no longer so critical to be a hacker. The nature of startups is changing. It used to be that all startups were mostly technology companies. Now you have things like The Gilt Groupe where they’re really retailers, and that’s what they have to be good at because the technology is more commoditized.

That’s probably why we have more female founders than we used to in the past, because the nature of the startups that they’re working on is different. You don’t have to be a hardcore hacker to start a startup like you might have had to be 20 years ago. It’s partly software eating world, and partly that there’s just more infrastructure.

Now that there’s Heroku you don’t need to do all that yourself, you just write some Ruby app and put it on Heroku and bang, it scales. Or AWS, you don’t have to a sysadmin quite as much anymore, you have Amazon racking your servers for you. It’s a combination of startups moving into different domains, that whole software eating the world thing, and infrastructure being more available so you don’t have to be such a hardcore nerd even to start a startup, like you used to have to be.

I remember the old days when you used to have to be really like…When we started a startup back in the ’90s we had the servers in our office with us. You couldn’t even co-locate servers in those days let alone have AWS.

Introducing The Information!

The_Information_mark_only

Dear Readers,

Technology news needs a reboot. There are more stories and outlets than ever, but a troubling cycle is playing out:

  • The race for pageviews and ad dollars is causing publications to focus on quantity over quality.
  • Coverage is consolidating around attention-grabbing topics, like the latest hot startup or celebrity CEOs. Publications are wasting time writing and regurgitating the same stories again and again.
  • Media outlets are relying on sensational headlines or idle speculation, not original reporting, to make their versions stand out.

The Information, launching today, is our first step towards building a publication that operates differently. We’re a team of reporters and editors who have learned from the best in the business, and we want to challenge ourselves to write better articles that break new ground. Period.

To do that, we are focusing on writing for readers we think are underserved: professionals in technology and in industries being upended by it. These readers find plenty to read every day but they don’t consistently find news that is relevant to them and their business challenges. They don’t often find news that takes a stand supported by facts. We aim to do both.
So, instead of chasing the highest number of eyeballs, we will chase and deliver the most valuable news. We’ve set the bar high. To succeed, we need to write articles that deliver value worth paying for. That’s why we’re a subscription publication.

We know this is an ambitious idea given the flood of free content on the market. To succeed we’ll have to do more with less, be ruthlessly focused, be creative and be consistent.

Those challenges drive us and make us so excited to be launching today.

We would love to hear from you. We have much to do and look forward to adding new features that our subscribers want. For now, we are thrilled you’re here to see what we have been building these past few months and to help us take the next steps.

Sincerely,

Jessica E. Lessin, Editor-in-Chief

jessica@theinformation.com, @jessicalessin

With PrimeSense, Apple Got Key Mapping Technology

There’s a lot of speculation about why Apple bought motion-sensor company PrimeSense. But I think the real reason has been overlooked.

PrimeSense’s chips were in early versions of Microsoft’s Kinect sensor, the gaming console that lets you wave your hands around to control it. So, many have jumped to the conclusion that Apple purchased the company for a component for its long-awaited, long-rumored TV.

I don’t think that’s it. Industry sources tell me PrimeSense’s motion-sensing technology for gestural controls is a little bit behind and that Microsoft doesn’t use it in the Kinect.

But PrimeSense’s technology is much more strategic for mapping, according to one person familiar with the company. In fact, companies like Matterport, which makes a camera for mapping three-dimensional spaces, use its chips.

We know Apple cares about mapping. The company bought WifiSLAM, an indoor GPS company, to help it map out malls and another indoor spaces in a race against Google, which is doing the same. Sooner rather than later, our phones will pull up scans of real spaces we want to visit or may be approaching. Those two-dimensional maps will seem very  obsolete.

As for the endless anticipation around an Apple television, I continue to hear that the company is more interested in set-top boxes for now and that some early prototypes haven’t had motion technology. Sure, Apple could add that technology over time but I don’t think we should be holding our breath for a device or for one controlled by waving our hands. Apple already sells millions and millions of very handy controllers. They are called iPhones and iPads.

An Apple spokeswoman didn’t immediately return a request for comment.

By 4 to 1, Early Adopters Pick Wearable Watches Over Glasses

By Eric Newcomer

One of the most important questions about the future of computing is this: wrist or face?

Google has been trumpeting its Glass devices, which can take photos and run applications like Facebook and Twitter on a small screen within eyesight. Apple, which is working on a secret smartwatch, has been publicly pushing the case for the wrist. “I don’t know a lot of people that wear [glasses] that don’t have to,” Apple CEO Tim Cook said at the All Things Digital conference in May. “I think the wrist is interesting. The wrist is natural.”

We thought we’d take a look at what consumers today say they would be more willing to buy as a signal of what they’re likely to find more natural. Watches had the clear win. But the largest contingent didn’t want either.

Thirty-eight percent of those surveyed opted for smart watches compared with 10% for smart glasses, according to a survey we commissioned of 417 Americans on SurveyMonkey Audience. Forty-five percent chose neither, while 6% chose both.

SurveyMonkey Smart watch or Smart glass

A majority of respondents, 62%, said they thought that it was possible that they would own a smart watch in the next five years. Only 41% of respondents thought it was possible that they would own a smart glass device in the next five years.

Survey Monkey (Graph 2) Smartwatch

Survey Monkey (Graph 3) Smart glassEven among respondents who considered themselves “quite tech savvy” or “extremely tech savvy,” smart watches won out over smart glasses, 38% to 17%, with 12% indicating that they were interested in both.

Survey Monkey (Graph 4) very tech savvy

Why does this matter?

Many app developers and hardware companies are betting that a new generation of wearable devices will create a new hardware market. In 2014, manufacturers are expected to ship 15 million smartwatches and by 2020 that number could reach 373 million, according to emerging markets research firm NextMarket. That admittedly optimistic estimate is based, in part, on the more than 1 billion yearly conventional watch shipments.

Consumer surveys, of course, have their limits. Plenty of people were initially skeptical that tablets would upend the PC market, for instance. Attitudes can change once users learn more about the full range of features offered by a new class of hardware.

For another metric on the glass versus watch debate, check out this Google Trends graph on search terms over time. The most-searched term, in blue, represents Google Glass. Green is “Samsung Galaxy Gear” and “Galaxy Gear,” red represents “smart watch” and “smartwatch,” and yellow is “smart glass” and “smartglass.”

Google Trends includes Galaxy Gear

Google Glass beats other search terms, but the smartwatch category ranks higher than smart glass. That’s why many app developers believe that the smartwatch category is still waiting for a truly dominant player like Apple to enter the market. An appealing offering from Apple could further boost interest in a smart watch.

For a dose of perspective, check out the same Google Trends graph after we add “iPhone” into the mix. The iPhone, in search as in the physical world, dominates the competition. Our old search terms are barely visible compared to the soaring purple line that represents iPhone searches. Wearables have a long way to go.

Google Trends iPhone new

Another comparison might be fairer to the early days of wearables. This graph shows first the rise and fall of the Palm Pre (blue) and then the emergence of Google Glass (red). Both had a similar level of interest in their early days, according to Google Trends.

Google Trends Palm Pre v Google Glass

Why Google+ Doesn’t Need Ads

By Amir Efrati

Google Inc. this week unleashed a slew of updates to its Google+ social-networking service and hinted that ads were coming.

Since Google unveiled its competitor to Facebook and Twitter two years ago, the Web juggernaut has kept the site free of ads in order to build up its base of users without annoying them with marketing messages.

The Google+ team has considered introducing graphical or photographic ads that look just like other Google+ posts that would show up in a person’s activity stream, according to people who were involved in discussions. That model is similar to some of the ads on Facebook.

But Google+ may not be ready for advertising. There are doubts about whether the social network can come up with a novel ad format that is both attractive to brand advertisers and can reach a lot of active users. Both of those pieces are necessary if Google is to benefit from selling advertising directly on the service.

Before we dive into why Google should hold off on splashy social-network ads, let’s acknowledge that it seems counterintuitive for the company to sit on the social-media advertising sidelines.

Google needs new ad formats as the company’s Web-search advertising business matures. That business grew at less than 20% over the past year, down from around 35% in 2011.

While Google’s overall market share in online ads has been increasing slightly and the company remains the industry leader, executives have fretted about Facebook’s potential to chip away at that advantage over time, even though it’s a smaller company than Google by several orders of magnitude.

Some within the company believe that social media ads could both diversify the ad-revenue stream and better compete with Facebook, especially since the category is growing quickly, particularly on mobile devices. Facebook’s advertising revenue has been growing at an annual rate of more than 60% while Twitter’s revenues are growing by more than 100% annually.

But there has long been another school of thought within Google that social media ads don’t hold a candle to the kind of search-based ads that propelled Google’s success. There have been numerous internal debates about Google+ ads, starting in early 2012, according to a person who was involved in them. It was unclear whether the ads proposed initially would be effective, move the needle for Google and support Google+’s purpose. Some forces argued that such ads wouldn’t add much value to Google+ users or to advertisers, in large part because there weren’t enough active users to see the ads, this person said.

Google+’s traction with users — a big factor in whether ads there would make sense — has been notoriously difficult to gauge.

Google+ head Vic Gundotra on Tuesday said 300 million people were “active in the Google+ stream” every month, up from 190 million in May. The comments make it sound as if those people navigated to the main Google+ destination site, plus.google.com.

But according to people who have worked at Google, the reality is less impressive. The Google+ stream is broadly defined. In the past, statistics about active users in the stream included anytime a person clicked on the red Google+ notifications in the top right corner of their screen while they were using Web search, Gmail, or other Google Web services. The person didn’t actually have to visit plus.google.com to be counted as “active.”

Comparing Google+ to Facebook purely as a social destination site is difficult, but one previously undisclosed statistic might help. In the middle of last year, fewer than 10 million people visited the Google+ stream at plus.google.com every day, according to a person who had direct access to that information at the time. During that same time period, Facebook had more than 500 million daily active users, according to Facebook. (The Facebook figure is somewhat inflated because it includes people who took an action to share content or activity with their Facebook friends via third-party websites, not just people who visited their main Facebook newsfeed, which is equivalent to the Google+ stream.)

There’s no doubt that Google+ is growing. The network’s mobile app comes preinstalled on hundreds of millions of Android-powered smartphones and tablets activated every year, including in regions where people are coming online for the first time and don’t have a Facebook account.

Google’s social network serves many purposes for Google besides allowing people to share photos and videos with friends like they do on Facebook, and for video-conferencing. Google has been integrating elements of Google+ in Web search, YouTube and other sites, making it an integral part of many products. And the company is using Google+ to turbo-charge its own existing advertising businesses. Long ago it started bringing some data from Google+ to into search ads, a move that ad agencies say helped improve the ads’ effectiveness.

The company is using Google+ to tie people’s online activities to their real names and determine who those people’s friends are and what they are interested in. By integrating Google+ across its many properties, Google has said it can obtain some of this information and be able to target people with more relevant ads, including on its Web-search engine. And Google’s recent privacy-policy changes gives the company the freedom to incorporate a person’s Google+ information and photo into ads.

For those who think the market is too big to ignore, Google also is benefiting somewhat from the rise of social media ads on Facebook. Earlier this month it struck a deal with Facebook to allow advertisers to use Google’s tools to buy ads on Facebook. That could marginally improve Google’s “exchange” business, which helps advertisers buy graphical ads across the Web.

For Google, the real secret sauce of social is deploying the demographic and personal-interests data – the same data that makes Facebook ads targeted and valuable in the first place – across the entire Google network. If Google obtains and wisely uses enough of that data, then gumming up its social-network with ads might not be necessary.

A Google spokeswoman didn’t respond to multiple requests for comment.

Follow Amir on Twitter and Google+

Android’s Next Targets: Wearables, TVs, Low-End Phones

By Amir Efrati

The launch of Google Inc.’s Android KitKat, the next version of the most widely used operating software for smartphones and tablets, is drawing near. Google executives haven’t announced a release date but people who have been briefed on KitKat say that it is coming soon.

There have been several reports about KitKat’s likely features based on leaked screenshots and leaked photos of the Nexus 5 smartphone that will be the first device to show off those features. But we’ve reviewed a confidential file that Google shared with companies that make Android devices to explain the most important new features. (A Google spokeswoman didn’t respond to requests for comment.) Here’s what we know.

One Android to rule them all?

With KitKat, Google has worked even harder to address one of Android’s biggest disadvantages versus Apple: less than half of Android devices are running the latest version of the software, called “Jelly Bean,” which was released in summer 2012. Nearly two-thirds of Apple devices already are running the latest version of its iOS software, released last month, the company has said.

This Android fragmentation makes it tougher for Android app developers to run the latest versions of their services across all Android devices. Some earlier releases of Android were better suited to higher-end devices that have more memory capacity for all the newest features. As a result, cheaper phone makers sometimes ended up using older versions of Android.

The document about KitKat that we reviewed, marked “confidential,” makes clear that Google wants its new software to work well on low-end phones in addition to the more expensive Samsung Galaxy and HTC devices.

KitKat “optimizes memory use in every major component” and provides “tools to help developers create memory-efficient applications” for “entry-level devices,” such as those that have 512 megabytes of memory, according to the document.

Google has long sought ways to help make the newest versions of Android compatible with low-cost devices, the kind that are proliferating in developing countries with the help of manufacturers like Huawei, ZTE, and others. This time Google has been more proactive with makers of lower-memory devices, said people who have been briefed on that matter.

Questions remain about whether the effort will bear fruit. In many markets, wireless carriers don’t do a good job of pushing software upgrades to existing Android devices that already have been sold.

The improvements for low-memory devices also could help the software to better power wearable-computing devices.

Wearing it proudly

The KitKat release shows that Google is preparing for the rise of wearable-computing devices. According to the confidential document, KitKat is expected to support three new types of sensors: geomagnetic rotation vector, step detector and step counter.

These features are likely geared for forthcoming Android-powered smartwatch made by Google and possibly the company’s head-mounted Google Glass, as well as non-Google devices. Android smartphone apps that track people’s fitness also could get a boost from the new feature as more manufacturers pack motion sensors into devices.

There is another potential benefit to Android from supporting these kinds of sensors: Google will be able to tell how far someone walked based on the steps they took. That could come in handy as Google tries to map more indoor locations such as malls and airports, where GPS and WiFi sensors don’t always do a good enough job of pinpointing exactly where a smartphone user is located. It also could improve the walking directions that people use on Google Maps.

Another crack at NFC

KitKat will allow developers to create services to allow phones to “emulate” physical cards that let people make payments, earn loyalty rewards, enter secure buildings and public-transit system, according to the confidential document. But it’s unclear whether the change will spur growth in the area.

Google has been a huge proponent of Near-Field Communication technology, which allows phones to exchange data with other devices over distances of a few inches. The technology enables people to pay for things at stores with their phones, among other users. But the technology hasn’t gotten much adoption from app developers, nor has Apple embedded it in the iPhone.

On Android, adoption was slowed in part because developers couldn’t create apps that emulated what physical cards do in the real world without first getting permission from wireless carriers, says Einar Rosenberg, chief executive of Creating Revolutions, which makes NFC-based apps. That’s because carriers control a part of the phone called the “secure element” where a card owner’s personal information is stored.

According to the KitKat marketing materials, developers will be able to emulate cards without keeping people’s information stored in the secure element.

The biggest question mark about the feature is where the personal information will be stored without running the risk of getting manipulated or stolen by hackers, Mr. Rosenberg says.

Control the TV

Google wants your Android device to be a remote control. The next version of Android lets developers build apps that control TVs, tuners, switches and other devices by sending infrared signals.

Samsung and HTC devices already have built-in infrared “blasters” and both companies used a company called Peel to design an app that can control TVs. But KitKat will help developers avoid having to write different apps for different hardware makers because there will now be a standard way for all apps to tell the Android device to activate the blasters.

Bluetooth boost

Google wants Android apps to be able to interact with a wide variety of devices using Bluetooth technology. Those devices include joysticks, keyboards, and in-car entertainment systems. In KitKat, new support for something called Bluetooth HID over GATT and Bluetooth Message Access Profile will allow Android to talk to more devices than before.

We have oodles more details about Android KitKat but much of it is too technical to describe here. Find me on Twitter or Google+ if you have questions about features that will be included in the release.

A Biotech Start Up Forgoes VC money

Venture capitalists should pay attention to a development brewing in the medical world.

The Children’s Hospital of Philadelphia last week funded a new gene therapy business called Spark Therapeutics. The move was notable because it’s unusual for a research institution to launch a promising biotech company and to cut venture capital firms out of the process.

While the hospital’s $50 million investment is a one-off deal, it could herald a world where well-funded institutions find creative ways to grow without VC money. It comes as other research centers, like Stanford University, also have been getting into the for-profit game.

The Children’s Hospital is investing in gene research just as the overall biotech investment landscape is shifting. Venture funding in that sector peaked near $6 billion in 2007, bottomed out in 2009 and 2010, and then began a slow march upward, hitting about $5 billion in 2011, according to data from BIO, the Biotechnology Industry Organization. After sliding a bit, investment is on track to hover between $4 billion and $5 billion this year.

The Children’s Hospital isn’t just another institution allocating endowment money to a VC firm’s biotech vehicle. The hospital didn’t even co-invest alongside an investment fund, a practice that has become increasingly common as limited partners, particularly private equity LPs, seek bigger returns and more favorable fee structures. Rather, it bootstrapped a for-profit company, a move that Travis Blaschek-Miller, a spokesman with the life science association Bay Bio, says is highly unusual.

The story of Spark, in a nutshell, goes like this: About a decade ago, Katherine High, a doctor, clinician, scientist, and adviser to many gene therapy start-ups, convinced the Children’s Hospital of Philadelphia to help fill a research void. Her field had been promising. Throughout the 1990s, scientists had explored the idea of treating damaged genes, which often cause diseases, rather than treating the illnesses caused by flawed genes. The new approach was often referred to as “gene therapy.” But when a teenage boy died in 1999 due to complications related to an experimental treatment, VC money dried up and companies closed down.

The hospital supported a cellular and molecular therapeutic research unit with research funds. The work yielded a potential cure for a rare form of inherited blindness. To get the treatment through clinical trials and, hopefully, to obtain Food and Drug Administration approval, Ms. High’s team would need a serious capital injection. It seemed likely that they would travel a well-worn path—seek early stage funding, spin out from the hospital, and effectively give up the biggest piece of the equity and the potential upside.

But in a move announced last Tuesday, the hospital used money that would normally have gone toward research to form Spark around the work done by Ms. High’s team.

“Now the hospital and the researchers are in a position to retain the biggest slice of the enterprise value pie,” says Spark chief executive Jeffrey Marrazzo. He adds that academic organizations and research hospitals usually license their work to other companies and get low-single-digit royalty rates. The gene therapy for blindness is in Phase 3, the final phase of trials before FDA approval. It’s vying to be the first-ever FDA-approved gene treatment. The enterprise value could be big.

Not every research center will be able to follow Spark’s lead, since many hospitals and foundations don’t have the same money and flexibility as the Children’s Hospital. But Spark is a notable case study for well-capitalized institutions. Venture firms are patient money to a point, but they made their priorities clear in the late 1990s and early 2000s by leaving the gene therapy sector. For Spark, the hospital is a financial partner with a shared mission that will hopefully be around longer than early-stage investors. “The Children’s Hospital, which has existed for hundreds of years, is not going anywhere,” Mr. Marrazzo says.

Inasmuch as the Children’s Hospital seeks to reap financial benefits from homegrown talent, the Spark investment resembles Stanford University’s decision to invest in tech companies developed by the school’s students.

But there are two important differences. Stanford uses endowment funds, whereas the Children’s Hospital essentially owns a for-profit company. And Stanford, which says it has deployed millions of dollars over the past couple of months via the Stanford-StartX Fund, is always a follow-on investor in companies that have already raised financing rounds. The hospital, by contrast, has bypassed venture capitalists entirely for now.

It appears to be a good time for the Children’s Hospital to make this bet. The public markets are embracing biotechnology. The NASDAQ biotech index has nearly tripled since 2009. There have been 35 initial public offerings in the sector this year, including gene therapy company BlueBird Bio. BIO reports that those stocks have posted a median gain of 56%. Of the companies that held IPOs, five were working on drugs that were in pre-clinical or Phase 1 testing, showing investors’ willingness to take more risks. “VCs are getting a liquidity event even if their companies haven’t sold a product,” says Mr. Marrazzo. “The public markets have helped get venture capital money back into gene therapy and other biotech companies,” he says.

As investors look for opportunities in sectors like medicine, it’s good to see a hospital have the confidence and resources to bet big on its own product. If the Children’s Hospital’s investment pays off, it will be a lesson to other players in the field that they don’t have to cede all the upside to the financial professionals.

In Perpetual Reinvention, SoftBank Eyes Shift to Mobile Content

by Katie Benner

When Japanese telecom company SoftBank Corp. announced two big acquisitions last week – a $1.5 billion deal for Finnish game maker Supercell on Oct. 15 and a $1.3 billion deal for hardware distributor Brightstar on Oct. 18 – it seemed like just another tech giant shopping around for ways to diversify and grow. But SoftBank is no ordinary company when it comes to M&A. The latest moves of its CEO Masayoshi Son show that the company is looking for ways to become a force in mobile content, an interest that could someday spark a corporate makeover.

Over the past three decades Mr. Son has used acquisitions to anticipate secular changes in the tech industry, a pattern that is evident in the company’s annual reports, executive letters, and earnings results. The architect of SoftBank’s M&A and investment strategy, Ronald Fisher, did not return calls for this story, but company documents show how investments have spurred prescient shifts in corporate strategy and big changes to the core business.

SoftBank is currently the world’s third largest wireless carrier, but that has not always been the case. Mr. Son has transformed his company about every decade thanks to acquisitions that were, at first, ancillary to the core business. In the mid-1990s, the company was a publishing company. By the mid-2000s, it was an Internet powerhouse. “Through investing in information industry-related businesses we gather intelligence about transformative opportunities and new future trends,” Mr. Son wrote in the latest annual report.

It’s not common to see a corporation constantly reinvent itself, but those that do so successfully are among the world’s best, most exciting businesses. General Electric was once a light bulb maker and now it’s one of the country’s largest issuers of consumer credit. IBM made typewriters and now it runs data analytics for large companies. A few much younger companies are trying to be chameleons, too. Amazon is still an online merchant, but it’s making big bets on digital media and hardware. Google is still a search company, but it is also a serious software maker.

Before we consider what Supercell and Brightstar could mean for SoftBank, it’s important to understand how acquisitions have led to corporate change. SoftBank was established in 1981 as a PC software distributor in Japan. In order to expand into the United States, Mr. Son bought PC trade show operator COMDEX in 1994, and technology trade magazine publisher Ziff-Davis in 1995. The deals got SoftBank into the U.S., and put the company squarely in the flow of information about emerging technology companies.

Information from COMDEX and Ziff-Davis convinced Mr. Son that the Internet, not hardware, would fundamentally change technology. The CEO of Ziff-Davis arranged for Mr. Son to meet with Yahoo founders Jerry Yang and David Filo, and in 1996 SoftBank became Yahoo’s largest shareholder and got a controlling stake in the new venture Yahoo Japan.

By 1998 SoftBank was a media company. Publishing and events accounted for about 71% of income. Yahoo Japan and investments in online properties like E*Trade and GeoCities led Mr. Son to believe that everyone would someday be online. So he invested in broadband and fixed-line telecom companies from 2000 through the middle of the decade, in anticipation of a need for high-speed connectivity.

By the mid-2000s, SoftBank was an Internet company with nearly all of its operating income coming from Yahoo Japan, online commerce sites, and online advertising. At the same time it was using acquisitions to become a telecom company with a presence in mobile. The media division barely registered in terms of revenue or income.

This history brings us to the SoftBank of today, a wireless operator that became a global player when it completed a $21.6 billion acquisition of Sprint this June. The company generates 64% of revenue and 62% of earnings from the mobile communications business. Last week’s deal for Brightstar — a device middle man between hardware makers, retailers, and wireless companies — could increase SoftBank’s influence with manufacturers by combining the purchasing powers of SoftBank and Brightstar. That’s a good position to be in given that a lot of consumers (and, presumably many SoftBank wireless customers) are hunting for phones. Research firm eMarketer says only 20% of the world currently uses smart phones.

But the Supercell deal shows that SoftBank is preparing for a future where wireless may not dominate the company’s financial picture. Marc Einstein, a consultant with Frost & Sullivan, said the deal illustrated that “mobile operators need to be more forward looking.” He predicted that revenues from mobile services will fall in the next four or five years.

Supercell strengthens SoftBank’s subsidiary GungHo, a company that began as an online auction site and morphed into a game maker several years ago. GungHo makes one of the world’s best selling mobile games “Puzzle & Dragons.” The app generates more than $3 million a day, according to Macquarie analyst David Gibson, and has been popular in Japan. Now GungHo can reach players in Europe, where Supercell’s games “Clash of Clans” and “Hay Day” are among the most popular.

“Games are a way to access growth,” says Andrew Hawn, who works at the consulting firm the Futures Company. Citing data from eMarketer, he says about 40% of mobile device users will play games on their devices this year, a number expected to hit nearly 60% in four years.

SoftBank’s VC funds have invested in lots of companies that — like Supercell and GungHo — reach consumers through mobile devices. Familiar names include Gilt Group, RebelMouse, Mobile Day, FitBit, and Paper.Li. There are also lots of media companies in the portfolio like BuzzFeed, the Huffington Post, Rap Genius, and Now This News. While other VC investors in these companies are hoping for big returns, SoftBank is also using information from these investments to figure what kind of company it will become next.

With the Sprint deal so recent, it’s hard to imagine a world where wireless is no longer SoftBank’s most important business. Supercell doesn’t necessarily mean that SoftBank will be the next Nintendo (though we shouldn’t rule it out). But it does show that Mr. Son is trying to figure out how consumer adoption of mobile content will change his company, even though the world simply sees him as the operator of a global wireless powerhouse. For those who want to understand the next phase of tech and anticipate SoftBank’s next core business, keep an eye on the company’s acquisitions. They’ll do much more than just support a wireless giant.

(To receive more stories like this, please sign up with your email at JessicaLessin.com.)

Apple’s New Retail Chief is a Watch Lady and More

By Jessica E. Lessin

I’ve uncovered a few timely nuggets about Apple lately, and I thought I would just spit them out and get you the information.

Apple’s New Retail Queen

Apple’s new retail chief Angela Ahrendts is a watch lady, say people who know her. I am certainly not implying that Apple, which is developing the iWatch, nabbed this high-profile executive because she loves watches or because one of her most recent additions to the Burberry line was a very high-end watch brand (both true).  I also hear she took particular interest in the watch retailing space in Burberry stores. Let’s just say her passion for watches is a coincidence. Or maybe just a plus. Needless to say the merchandising around the iWatch, whenever it arrives, will be remarkable.

How Low Can the iPhone 5C Go?

Apple CEO Tim Cook and other Apple executives have been hinting in conversations with analysts and investors that the company could discount the less-expensive iPhone 5C over time. Specifically, they have referred to some “behind the curtain” ways to do so before a new model comes out, according to people who have talked to the executives.

Why does this matter? Investors are particularly eager to see how Apple plays with pricing now that it has splintered the iPhone line. Remember when everyone was worried because the iPhone 5C wasn’t cheap enough take off in China? It is still far from affordable in developing countries, but clearly Apple isn’t afraid to drop the price and is signaling, in its own subtle way, that it may do so.

As an aside, I have been watching Walmart, Target and others slash the price of the iPhone 5C to as low as $49 with wireless contract in recent days. That’s $50 less than Apple sells the device for and an unusually steep discount for the unabashedly luxury Apple. I was wondering if that’s a bad sign for Apple, signaling weak demand. My strong hunch is that retailers are discounting themselves to drive store traffic. Pricing in Apple’s country-specific online stores is steady, according to Piper Jaffray. If Apple starts charging retailers less, we’ll probably see some pricing changes in the online stores.

An Apple spokeswoman didn’t get back to me for comment.

Amazon Has Discussed Teaming Up with HTC on Phones

By Amir Efrati and Jessica E. Lessin

Amazon.com Inc. has discussed building a line of phones with Taiwanese handset maker HTC Corp., according to people who have been involved in HTC’s strategy.

The current status of the talks is unclear and Amazon, whose phone aspirations have been well documented, may have chosen another route. But the conversations show that Amazon has considered leveraging the expertise of a well-known smartphone brand to produce phones rather than oversee the design and manufacturing process on its own, like it has with tablets. (The Financial Times is also reporting on the talks this morning.)

The discussions tell us as much about HTC as Amazon. HTC appears to  be shifting its strategy as it scrambles to avoid becoming the next Blackberry or Nokia.

The Taiwanese handset maker was once the poster child for Android phones, working closely with Google on early Android devices. But it has been eclipsed by rivals, especially Samsung. The South Korean giant is running away with the handset market along with Apple.

Some analysts have said HTC, whose stock has slid dramatically since its mid-2011 peak, may need to sell or find a strategic investor if it cannot reverse its slide in revenue and profits. The company has said repeatedly it is not for sale.

With its global smartphone market share having sunk to the low single digits, HTC is pursuing a new more partnership-heavy strategy. It worked closely with Facebook to release the HTC First. The phone was the first to carry a new package of Facebook mobile software but had disappointing sales.

For Amazon, HTC has technical experience that could supplement its Lab126 hardware unit, which is heavy on design expertise. (While Lab126 handled the Kindle Fire, tablets are a lot easier to build than phones.)

HTC also has relationships with U.S. wireless carriers that could help Amazon sell phones. Amazon also has been discussing ways to preload more of its mobile apps onto existing HTC devices, according to a person who has been involved in those talks.

Spokespeople for Amazon and HTC declined to comment. Earlier this month, Amazon said it wouldn’t launch a phone this year.

Amazon has been casting about for partners for a while. This year it held talks with at least two other hardware makers about working on a smartphone. But those particular talks didn’t result in a deal, according to people who were directly involved in those discussions.

One factor complicating Amazon’s efforts is hardware-makers’ existing relationships with Google. Google, which develops Android, forbids hardware companies who build Android devices that run Google services from building devices that use modified versions of Android that aren’t compatible with current Android apps.

Amazon’s mobile software, which powers its Kindle Fire tablets and would likely be used for its possible smartphones, is derived from Android but isn’t compatible with Android apps.

An Amazon-HTC deal would put Google in a tricky position. Google is rooting for handset makers like HTC to stay alive, to counter the power of Samsung. Samsung is the dominant-maker of Android phones and therefore could theoretically develop leverage over Google. Google bought Motorola last year as a hedge.

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