September 2006 - Fabrice Grinda

The past, present and future of French Internet entrepreneurship!

With apologies the French Internet Entrepreneurs I have not met yet.

As part of my whirlwind tour of the world, I spent a few days in Paris last week. On Thursday evening I threw a dinner party with most of the French Internet entrepreneurs I knew at Noura, a good Lebanese restaurant.

The discussion was intense and fun with tons of ideas, laughter and dreams flying around. There was palpable energy in the air as we remembered the bubble days and shared our dreams about the future.

On the picture you can see from left to right: Fabrice Boutain, Mark Oiknine (standing), me, Aymeric Chotard, Patrick Robin (standing), Bertrand Pulles, Julien Babin, Antoine Mermet et Michel de Guilhermier. Gael Duval took the picture.

Only Marc Simoncini (Meetic) and Yseulys Costes (MilleMercis) could not make it.

It’s interesting to see how all the “old” Internet entrepreneurs have essentially stuck to their guns and are all still on the Internet:

After selling Imaginet, Patrick Robin is just starting 24h00.fr a luxury item discount store where items go on sale for only 24 hours
After selling PageFrance, Fabrice Boutain is running Anxa.com a premium self-help service company
After selling the online ad agency Alpaga, Gael Duval recently created a new online ad agency Un77.com

As for the others, Michel de Guilhermier runs Photoways, the Snapfish equivalent of Europe. Aymeric Chotard has been with 2xmoinscher.com for over 6 years and recently sold it to Les 3 Suisses. Julien Babin and Antoine Mermet recently left Meetic and Google respectively to create Keyade.com, a search engine marketing company.

Bertrand Pulles was a bit the exception as he has been working for France Telecom since selling his company to them in the bubble days.

As for Marc Oiknine, he’s a former entrepreneur and now venture capitalist with Atlas Ventures.

All in all, I was humbled by the energy, talent and vision that everyone around the table had. As Michel puts it: “Without a doubt the numerous talents here tonight will create Web 3.0 once the Web 2.0 bubble bursts! We live in a blessed period: the market is here, money as well, there are countless opportunities, go for it!”

For a different take (in French) on the dinner, see Michel’s blog: http://micheldeguilhermier.typepad.com/mdegblog/2006/09/diner_dentrepre.html

Paris, je t’aime is amazing!

This movie consists of a collection of 16 short films about life, love and love of Paris in Paris. It is well done and touching because it feels so real.

The acting, writing and directing is great. The directors include the Coen borthers, Wes Craven and Gus Van Sant. Some of the actors include Nick Nolte (who is great!), Juliette Binoche, Willem Dafoe, Maggie Gyllenhaal, Gerard Depardieu, Eliha Wood and Natalie Portman.

I hope it comes out in the U.S.!

Lessons in life: the humbling transformation of Andre Agassi

I just read Gary Smith’s amazing mini-biography of Andre Agassi in Sports Illustrated. The story of his rise to the top, his fall and rebirth is fascinating and humbling. Few people are able to change fundamentally who they are and yet Agassi went from being the man who stood for “Image is everything” to the one who stands for “Humanity is everything.”

I had always been impressed by the humility he had in press interviews in recent years – always praising his opponents and grateful to be where he is – the article gives a glimpse of why that is.

Be grateful, stay humble, be at peace with yourself and the world, stay hungry!

Red Doors is delightful

Red Doors is a dark comedy about a dysfunctional Chinese-American family coming of age in New York. The film has been described as American Beauty meets Joy Luck Club. The movie is agreeable and keeps you on edge by alternating between cheeky humor and darkness. If you live in New York, go see it! If not, I hope it will get a larger distribution soon!

For full disclosure, I am a very small investor in the movie and am close friends with the director.

Live long? Die young? The answer is not in your genes

My last posting showed how deliberate practice overwhelms differences in natural ability to explain the success of top performers which led to the conclusion that you have to do what you love and love what you do!

This posting is somewhat related as recent studies on longevity are showing that genetic make-up is not a good determinant of life expectancy. Studies have shown that while your height is 80 to 90 percent determined by parents’ height only 3 percent of your life expectancy can be explained by how long your parents lived.

Even identical twins usually die years apart. Genetic makeup can influence your predisposition to a certain disease such as cancer, but studies have shown that even in identical twin if one twin gets the disease the risk that the other twin gets it is only slightly increased relative to the average population.

While the study did not say whether it was the environment that impacted longevity, it emphasized the importance of random events: a bad mutation that leads to cancer, a bad fall, a car accident, etc.

You can read the full article at:
www.nytimes.com/2006/08/31/health/31age.html?hp&ex=1157083200&en=9198431085b8eb21&ei=5094&partner=homepage

A Star is Made

If like me you loved the inquisitive mindset in Freakonomics where the authors ask numerous unrelated questions of how the world works, you will find the following article fascinating. Stephen Dubner and Stephen Levitt, the Freakonomics authors, start by analyzing the birth-month soccer anomaly to conclude that two people’s innate genetic differences in doing any task is often overwhelmed by how much practice each person had had at the given task.

The birth-month soccer anomaly is that elite soccer players are more likely to have been born in the earlier months of the year than in the later months. This is even more pronounced for the youth teams that feed the World Cup and professional ranks. On recent English teams, half the elite teenage soccer players were born in January, February or March. In Germany, 52 elite youth players were born in the first three months of the year, with just 4 players born in the last three.

I won’t reveal the cause of the birth-month anomaly – read the article 🙂 – but suffice it to say it’s not that certain astrological signs confer superior soccer skills!

As part of their inquisition, Dubner and Levitt analyze the “Cambridge Handbook of Expertise and Expert Performance” a 900-page academic book on performance by Andrew Ericsson, a psychologist at Florida State University. The book studies expert performers from a wide range of pursuits, including soccer, golf, surgery, piano playing, Scrabble, writing, chess, software design, stock picking and darts. The intriguing conclusion is that the trait we commonly call talent is highly overrated. In other words, experts are made, not born. Practice does make perfect as our parents have been telling us all along!

The conjoint conclusion is that when choosing a path in life you should do what you love – because if you don’t love it, you are unlikely to work hard enough to be very good. Most people naturally don’t like to do things they aren’t „good“ at. So they often give up, telling themselves they simply don’t possess the talent for math or skiing or the violin. But what they really lack is the desire to be good and to undertake the deliberate practice that would make them better.

Read the full article at:
www.nytimes.com/2006/05/07/magazine/07wwln_freak.html?ex=1157688000&en=57d48facd169cf87&ei=5070

The Long Tail

If you read this blog, chances are you know what the long tail is, but just in case, I felt like reiterating it.

The phrase The Long Tail was first coined by Chris Anderson of Wired Magazine. Anderson argued that products that are in low demand or have low sales volume can collectively make up a market share that rivals or exceeds the relatively few current bestsellers and blockbusters, if the store or distribution channel is large enough. Examples of such mega-stores include the online retailer Amazon.com and the online video rental service Netflix. The Long Tail is a potential market and the distribution and sales channel opportunities created by the Internet often enable businesses to tap into that market successfully.

A former Amazon employee described the Long Tail as follows: „We sold more books today that didn’t sell at all yesterday than we sold today of all the books that did sell yesterday.“

The key factor that determines whether a sales distribution has a Long Tail is the cost of inventory storage and distribution. Where inventory storage and distribution costs are insignificant, it becomes economically viable to sell relatively unpopular products; however when storage and distribution costs are high only the most popular products can be sold. Take movie rentals as an example: A traditional movie rental store has limited shelf space, which it pays for in the form of building overhead; to maximize its profits, it must stock only the most popular movies to ensure that no shelf space is wasted. Because Netflix stocks movies in centralized warehouses, its storage costs are far lower and its distribution costs are the same for a popular or unpopular movie. Netflix is therefore able to build a viable business stocking a far wider range of movies than a traditional movie rental store. Those economics of storage and distribution then enable the advantageous use of the Long Tail: Netflix finds that in aggregate „unpopular“ movies are rented more than popular movies.

The Long Tail has possible implications for culture and politics. Where the opportunity cost of inventory storage and distribution is high, only the most popular products are sold. But where the Long Tail works, minority tastes are catered to, and individuals are offered greater choice. In situations where popularity is currently determined by the lowest common denominator, a Long Tail model may lead to improvement in a society’s level of culture. Television is a good example of this: TV stations have limited time slots, so the opportunity cost of each time slot is high; stations therefore choose programs that have the broadest appeal. But as the number of TV stations grows or TV programming is distributed through other digital channels, the choice of TV programs grows and the cultural diversity rises.

You can read the full original Wired article at:
www.wired.com/wired/archive/12.10/tail_pr.html

The state of sleep research

Recent developments in sleep research are extremely interesting. The two most interesting findings are on the importance of non-REM sleep in memory formation and studies on Modafinil and CX717 in promoting wakefulness and quality sleep.

What is interesting is that most sleeping pills currently on the market only promote shallow stage 2 sleep which is much less restorative than “slow wave” sleep – which is why people who take sleeping pills sleep but rarely feel rested when they wake up. Somehow Modafinil allows users to stay awake for extended periods of time without accumulating “sleep debt,” allowing for quality sleep after the wakefulness period and without any of the side effects of traditional stimulants (e.g.; the he jitters, euphoria and eventual crash that come after caffeine).

You can read the full article at:
www.newscientist.com/article/mg18925391.300;jsessionid=MKKILCABJJLM

Rent … unless you want to buy :)

Experts have been arguing for a while that real estate is over-valued by looking at a number of metrics; e.g., housing prices relative to household income, historical trends of house price increases.

However, very few people connect with those arguments and reiterate: “when I buy a house I am building equity” or “rent payments go down the drain, at least when I buy I am paying towards ownership of the house.” I will explain why those assertions are wrong.

Fundamentally, a house is just another asset. Its value should be determined by the present value of the cash flows you can obtain from it. Those cash flows are the present value of the rent payments you can collect from it over time and the present value of the price you will sell the house for in the end.

In other words:

House value = present value of potential rent payments during the ownership period + present value of selling price

Unfortunately, it is very unwieldy for people to calculate house values that way. Not that many people know how to calculate present value, but more importantly there are too many variables that would be up for debate. People might know their discount rate and current rental values, but how can they reasonably estimate annual increases in rent and in the value of the house over the long run? Polling experts would give you a wide range in the annual price increase of the house – some give you a negative rate in light of the current high prices, some would grow prices with GDP and some would grow house prices faster than that in light of historical housing price increases.

If the present value of cash flow method is unwieldy, the easiest way is to look at the rental yield of the property. In other words, how much of the property value can you obtain in rental income yearly, based on current market prices.

Rental yield = annual rent income / current market price

For instance the current yield on the house I am renting in Long Island is 1.6%. Given that you can get 5.5% risk free in a money market at your bank, renting is clearly the best option by far! I can more than pay for the rent just with the interest of the money I would have had to spend to buy the house. My landlord (who I hope does not read this blog) would be much better off selling the house and investing the money in something else.

In a less exact way, you can also look at monthly costs of renting versus ownership. In other words you can compare monthly rent versus the mortgage cost plus the monthly maintenance cost plus the monthly property tax minus the monthly interest expense tax deduction. It’s not an economically exact representation of the two cash flows over time because you don’t know by how much rents will increase relative to changes in property taxes and maintenance. Not to mention the interest deduction varies, given that over time the amount of interest expense decreases as a share of the overall mortgage payment – but it gives you a sense of the respective costs. Note that you have to assume you are taking a 100% mortgage for the comparison to be correct, otherwise you would have to subtract from the rental cost the monthly income from funds that could have been put towards the house and have been invested elsewhere.

For my Manhattan 2 bedroom apartment, the monthly rent is $3,965. To buy the apartment would cost $2,000,000 which is $11,671 per month on a 30 year mortgage at 5.75%. My marginal tax rate is 40% and almost all of the payments are interest at this point, so I would get a $4,668 monthly tax break. The maintenance on the apartment is $1,249 per month and the monthly property tax is $1,039. In other words, I would pay $9,291 per month for the privilege of owning the apartment versus $3,965 to rent it – a $5,326 monthly difference. Again it makes much more sense to rent.

So what about “when I buy a house I am building equity” or “rent payments go down the drain, at least when I buy I am paying towards ownership of the house.” Well, yes ownership builds your equity stake, but consider that you could have been saving and investing the $5,326 in something else and letting it compound every month. In light of the current yield on real estate chances are you would be much better off in the long run – even if you place the savings in relatively safe asset classes.

So from a financial perspective it makes more sense to rent in New York right now than to own. However, life is not about maximizing your financial outcomes, it’s about maximizing your utility, economist speak for happiness 🙂 . Some people want the ability to remodel and change a house. Many people love having a place that is their’s and that they call “home.” In other words, if you get more happiness out of owning the house than the differential in cost between renting and owning, you should own!

In my case, I actually like not being tied down by financial assets and having the flexibility to go anywhere at a moment’s notice. So even at equivalent financial costs, I would probably choose to rent.

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