Some data on data.

"There was 5 exabytes of information created between the dawn of civilization through 2003 . . . but that much information is now created every 2 days, and the pace is increasing."

- Eric Schmidt, CEO, Google (1 exabyte = 1 billion gigabytes)

"So plot that curve and now you see why it's so painful to operate in these information markets. The information explosion is so profoundly larger than anyone ever thought—I certainly, it's larger than anything I ever thought—but that's what this opportunity creates."

- Eric Schmidt, CEO, Google

"In recent years Oracle, IBM, Microsoft and SAP between them have spent more than $15 billion on buying software firms specialising in data management and analytics. This industry is estimated to be worth more than $100 billion and growing at almost 10% a year, roughly twice as fast as the software business as a whole."

- Economist, February 2010

Pulling from Eric Schmidt's recent talks, one could say that in recent years, humanity's creation of data has gone from a light dusting to a veritable avalanche. And looking to the Economist's special report from February, "The Data Deluge," there are some stunning facts:

• "The amount of digital information increases tenfold every five years."
• "By 2013 the amount of traffic flowing over the internet annually will reach 667 exabytes . . . . [T]he quantity of data continues to grow faster than the ability of the network to carry it all."
• "When the Sloan Digital Sky Survey started work in 2000, its telescope in New Mexico collected more data in its first few weeks than had been amassed in the entire history of astronomy. Now, a decade later, its archive contains a whopping 140 terabytes of information. A successor, the Large Synoptic Survey Telescope, due to come on stream in Chile in 2016, will acquire that quantity of data every five days."
• The amount of data in the world is growing at a compound annual growth rate of 60%.

The foregoing facts show why last week, when I was discussing what I would invest in were I a VC right now, I said I would be looking for strong plays in data management, data demand, and data mining/processing. Revealing a thought I didn't really know I had until it came out of my mouth, I continued, "because the future is literally in their hands."

So why did I want to write about this? Primarily, the rapid expansion of data demand and data generation poses many large, interesting problems. It also creates vast opportunities and has led to the founding of some fascinating companies. And there will be much more potential for starting companies and creating value.

And as if this were not already clear, it appears I'm not the only one thinking about data, how it is changing, and how that will affect our behavior. In fact, soon after I began writing this, I found a recent post by Mark Suster on the same topic.

So as a survey, if I were looking for investments in this area today, what kind of companies would I be looking for?

Data Demand/Management -- I'd definitely be looking for companies with data management solutions to help meet the coming decade's massive data demand. These companies would be addressing critical problems in data compression and transmission.

Just look at current trends--cell phone providers are cracking down on unlimited data plans while ISPs are spending millions to fight net neutrality. To me, these demonstrate a broader pain point--meeting demand is incredibly complicated and expensive, and that means there is room for disruptive technologies to make waves in this field.

Among other sources of data demand, communication and mobile applications are only going to make these opportunities larger. The iPhone has crippled AT&T's networks in NY and SF, and the smartphone market is growing incredibly fast. Consumers want to be able to communicate from anywhere, download large files on the go, and stream content on a constant basis. Providers are feeling the pain. One solution may come with newly freed portions of the communications spectrum, which will allow a wifi-type signal to carry over kilometers, not meters, but it's clear that increased data demand will not slow and will continue to create opportunities in this space.

Data Storage -- 5 exabytes of data is being created every two days, and the pace of creation is only accelerating. Enough said.

Data Mining (i.e., making sense of it all) -- As Einstein said, "Information is not knowledge." One of the largest problems with the mountain of data being generated on a constant basis is that it's hard to know where to tap into it to make it meaningful. We have a surplus of data, and we have scarcity in terms of the time and resources necessary to make the most of it. Stated otherwise, there will be massive opportunities here. Case in point--Google's mission statement: "Google's mission is to organize the world's information and make it universally accessible and useful."

And some of the start-ups in this field are absolutely amazing. One of my long-time favorites is Palantir Technologies, which has created an incredible interface for sorting and making logical connections between massive amounts of data. Their demo videos show incredible applications, ranging from piecing together sleeper cells of terrorists to unwinding incredibly complicated tranches of mortgage-backed securities. Actually, if you've never watched their demos and you're a geek like me, just go watch some. They are absolutely amazing.

Another company I'm excited about in this space is Recorded Future, which is building a "temporal analytics engine" and has taken funding from both Google Ventures and the CIA. Its founder served in the Swedish special forces. The company claims that with the right data mining algorithms, they could predict the future. Obviously this would be massive for both counterterrorism and investment applications.

But these are just two interesting companies. I believe this space has incredible potential to generate innovative winners. Many industries are using the massive amounts of data collected to form increasingly complicated models for predicting behavior, and this has huge potential for controlling risk, with obvious applications to pooled risk (e.g., insurance policies) and investment schemes. Only time will tell who those success stories will be, but I am certain that great companies will rise to fill this void.

Data Security -- As we rely on data more and more--and as more is generated and transmitted in massive volumes--security will only become more complex and more important. In the next ten years, it is likely that all of our medical and financial records will be digital. As WikiLeaks has recently demonstrated, sensitive government documents are already digital and vulnerable to the whims of one or two petty officers with clearances. And data always implicates personal privacy concerns. Even if generational notions of privacy are shifting, even younger generations care about some baseline level of privacy, and data security goes hand in hand with those expectations. For one, the vast amount of personal and financial data being generated has large potential for new types of crime, as less-than-reputable persons have gained access to huge databases of credit card and social security numbers. Data security will only become more critical in the coming decade, and if I were investing today, I would be looking for teams with expertise and vision in this arena.

Conclusion -- As the Economist stated in its report on data:

"[T]he world contains an unimaginably vast amount of digital information which is getting ever vaster ever more rapidly. This makes it possible to do many things that previously could not be done: spot business trends, prevent diseases, combat crime and so on. Managed well, the data can be used to unlock new sources of economic value, provide fresh insights into science and hold governments to account."

That last sentence should get you excited. With data as with anything else in technology, challenges should be seen as a sign that there is underlying potential for transformative, disruptive opportunities. The "deluge of data" will not slow. It will only accelerate. At this point, there is no looking back. In that way, I'm bullish on data-driven opportunities for the same reason I'm bullish on cleantech: the underlying problems will only become more important, meaning the opportunities will only become greater. And a new generation of exciting companies is going to rise to seize them.

Which companies are you watching? Which spaces within data excite you the most?

Cleantech Event at Orrick Next Week

Orrick's Emerging Companies Group is hosting a Total Access event, 2011 Cleantech Opportunities and Outlook--The Investors' Perspective, in Menlo Park next Thursday morning, December 16.

For those of you who are not familiar with Orrick's Total Access series, the firm brings together panels of top VCs, entrepreneurs, and service providers, and each event is focused on a specific tech sector (cleantech, cloud computing, social media, biotech, etc.). These events always feature a variety of interesting and useful perspectives on their respective topics, and they present great networking opportunities.

Next week's event features an incredible panel of partners from some of Silicon Valley's top VC firms: Sequoia, MDV, NEA, and Draper Fisher Jurvetson. Moderating the panel is Orrick partner Mitch Zuklie. Mitch is one of the most distinguished corporate lawyers in Silicon Valley, he is a clear thought leader in the cleantech arena, and his client list is extremely impressive. But beyond all that, Mitch is a stand-up guy for whom I have great respect. He's also a very convincing recruiter (something I learned firsthand), and I feel quite fortunate to be able to call him my partner mentor at Orrick.

Furthermore, last night Mitch informed me that I no longer have a delayed start date with Orrick, and therefore I am starting as an associate in January 2011 (as opposed to January 2012). And for that, I made sure that he has a substantial shipment of Geary's Pale Ale (his favorite beer, brewed in Portland, Maine and only distributed on the East Coast) coming his way.

Next Thursday's panel promises to offer valuable insights into the cleantech landscape and what we can expect in 2011. It's certainly going to be an interesting year.

You can RSVP here--hope to see you next week!

Peter Thiel -- Stanford University -- Tuesday, Nov. 30, 2010

Note: This post was originally written for my good friend and colleague Michael Paratore's excellent blog, "The Stanford GSB SO Speaks."

I’d like to start off by thanking Michael for inviting me to write a guest post for his blog; it is an honor. I should also thank Meesh for making Michael a Stanford GSB SO--without her, the inspired title of this blog truly would not be possible. To introduce myself, I grew up in Illinois and studied engineering at the University of Illinois, graduating with highest honors. Michael and I met at Berkeley Law in the fall of 2008. We both made the wise decision to join Orrick's Emerging Companies group in Silicon Valley, and we will start with the firm in January.

Before I begin, I wanted to announce that this will also be the inaugural post for my new blog, Something Too Reed, in which I will discuss start-ups, venture capital, technology, and legal trends, with a focus on broader trends and the state of thought leadership in the Valley. Of course, there will be the occasional comment regarding my secondary interests--sports, the outdoors, travel, and food & wine (which should be just fine with the Bay Area tech demographic). Posts will generally be much shorter than this one, and my next post will be on data--the sheer volume we are seeing today, the future of data management software, and the opportunities that will be created by the coming decade's deluge of data.

Peter Thiel is a very notable figure in Silicon Valley. He attended Stanford for undergrad and law school, and he founded the Stanford Review, a libertarian newspaper. After clerking, practicing law, and trading derivatives, he co-founded PayPal, which was taken public and then sold to eBay in 2002. Since leaving PayPal, Thiel has run a hedge fund, Clarium Capital, while investing in a few slightly notable companies such as Facebook (for which he was the first outside investor), LinkedIn, Palantir, Slide, and Yelp. (Thiel is considered the Don of Silicon Valley's PayPal Mafia.) It is rare when such a talented entrepreneur is also a world-class success in technology investing, so I looked forward to the opportunity to hear some of Thiel's thoughts.

Thiel’s talk at Stanford was hosted by the Business Association of Stanford Entrepreneurial Students (BASES), a very impressive student group which carries the banner of entrepreneurship on what I consider to be the most entrepreneurial campus in the world. BASES did a great job putting this together, and the event was standing-room only (if you like, you can watch the video here). They looked past Thiel's somewhat anti-Stanford book and his "20 Under 20" drop-out-of-college initiative and put on a great talk with many thought-provoking points. I will cover the outline of Thiel's talk, as well as my thoughts on some of these issues, below.

(1) Technological progress

Thiel's first discussion point was not only insightful, but it touched on a topic that is near to my heart--how much are we (Silicon Valley or the human race more broadly) actually pushing technology forward? Are cool websites and UIs really progressing humanity's mastery of the physical universe?

Granted, there are no clear metrics for answering this question, but it has clear rhetorical value. At the micro level, many of today's Ph.D. students know all there is to know about extremely specialized, compartmentalized portions of their respective disciplines. (As engineering grad students like to joke, they know more and more about less and less until they know everything about nothing.) Thiel contends that researchers are often bullish on the individual technologies they are attempting to progress, but broader society often knows very little about these disciplines (e.g., quantum computing), and in this way he fears we are not discovering and then spreading knowledge as efficiently or effectively as we could be.

At the macro level, Thiel is looking beyond the Internet space, and he is concerned that humanity is not progressing as it should be technologically. The Internet and Web 2.0 have been impressive, but Thiel mourns the fronts where the 2010 imagined in the 1950s and '60s has not manifested itself--namely, robotics, permanent lunar bases, manned missions to Mars and Jupiter, exploration of our vast oceans, and conversion of deserts into forests. He further suggested that even biotech is falling behind the mandate of its real promise, contending that we saw more drug innovation in the 1970s and '80s than during the last 20 years.

This made me wonder whether R&D spending (as a proportion of GDP) had fallen off over the last 20-30 years, and in fact, it is near its all-time high at 3% of GDP. It has been around the 2.5-3% range for the last 20 years (about 2% of the 2.5-3% being non-defense R&D). So the explanation is likely not the R&D/GDP ratio, which would be an easy scapegoat. Unfortunately, that means the answer behind our lack of innovation (if you generally agree with Thiel's perspective on this point) will be harder to come by.

(2) Two modes of growth

In Thiel's mind, growth typically happens in one of two general modes: intensively, which embodies improvement and innovation, or extensively, which essentially embodies replication of that which has already been done. Technological innovation is the poster child for intensive progress, whereas globalization is generally extensive (i.e., developing countries such as China are generally trying to grow and develop by looking to what worked for the US and western Europe, even if that sometimes results in miles of empty development, as we saw in Ordos)--these nations are trying to copy the US and "catch up," and there is generally no need for much innovation to make that happen. Extensive growth only requires following predefined steps, as opposed to figuring out a new way forward. In contrast, "intensive" entities such as Apple and Google invent new classes of devices, create new markets, solve difficult problems, etc. Phrased differently, intensive growth changes the game; extensive growth seeks to play it.

Developing nations can often rely on "extensive" growth to achieve 5-10% growth per year, but for developed countries, Thiel contends, the way forward must be through intensive growth. And that is a difficult path, for going from 0 to 1, while not always as superficially impressive as going from 1 to n, is often tremendously difficult. Going from 0 to 1 means innovating--inventing something new or discovering something, whereas going from 1 to n is generally predefined--it is extensive growth (i.e., "scaling").

In terms of today's active technology sectors, Thiel views the technology side of cleantech as largely intensive, but he sees the field as "conflated with large political questions," creating "confused oscillations between technology and the government." Stated differently, for an investor, cleantech is a risky field because the long-term value proposition of companies is at the mercy of a volatile political climate.

Thiel seems to believe that the Internet is at a key tipping point. The last decade has seen wonderful intensive growth, which brought about the rise of a new generation of Internet companies--Google, Amazon, Facebook, etc.--and these were great new businesses, the success of which was easy to measure in terms of traction, user base, and profitability.

A major structural problem with Internet is that in today's investment climate, new businesses generally have to prove they have traction before they can get capital. But what if you're solving a hard problem? What if there is great potential or promising innovation, but traction will take some time? Investors are glad to fund "1 to n," but generally run from funding real, intensive innovation--"0 to 1."

Because of this, Thiel draws a parallel between the progression of the Internet and the evolution of the auto industry. In the 1920s, he said, if you wanted to enter the auto industry, you should have started a company. By the 1950s, a person with the same aspirations should have joined a company. Thiel contends that we've moved beyond the former, though we're not quite at the latter, either. I feel the analogy breaks down largely by considering the auto industry's barriers to entry (regardless of decade), but his point is well taken. CS majors leaving Stanford, Berkeley, CMU, and Illinois should not hesitate to turn their attention to unaddressed needs and difficult problems. In that way, they can seek to create value through intensive progress.

In light of his perspective, it should come as no surprise that Thiel himself is focusing on what he refers to as "under-invested" areas of tech: space, robotics, artificial intelligence, next-generation biotechnologies, and the application of computing and computer science to new areas. These are areas where he sees less competition and positive fundamentals.

(3) Q&A

"20 Under 20" Thiel Fellowship -- Thiel began his discussion of his "drop out of college" fellowship in diplomatic fashion by clarifying that he does not believe that any great number of students should drop of out college. I think that he sees the reasoning behind this program as twofold. First, a disproportionate number of tech's great entrepreneurs never finished college (see the beginnings of Apple, Microsoft, Dell, Facebook, etc.), and for those types of minds, he sees college as a waste of time and unnecessary. Second, Thiel fears that students in higher education rarely stop to ask themselves the fundamental questions: "Why am I doing this?, " "What is my education for?," and "What do I think my path will be?" He sees today's educational system as too tracked, guiding our greatest minds into finance, law, and medicine.

On being the first outside investor in Facebook -- Thiel and his friend, Reid Hoffman, looked into investing in many early social networks. Thiel thought Facebook would do well, but admits he had no idea it would ever have the $30-50B valuation it does today.

On social and mobile apps -- In case you couldn't guess from his prepared remarks, Thiel is concerned that the Valley is focusing on problems that are too narrow--these spaces are crowded, and many people are trying to fill them. Thiel repeated a remark I have heard from other VCs I respect in the Valley: as an investor, you want a deal that you know is fundamentally good, but on which no one else really agrees with you. He also expressed skepticism in the mobile Internet as a revolutionary step. In his mind, the transition from a PC-friendly Internet to the mobile Internet (i.e., the Internet on your mobile device) is not nearly as fundamental as our shift from paper-based media in the early 1990s to Internet-based media. The "Yelp of phones" is still Yelp, the "mobile Facebook" is still Facebook. In that way, it's not nearly as disruptive as it's made out to be. (Though he does concede that UIs have come a long way.)

On the Valley's recent love of businesses that "are not capital-intensive." -- This still does not mean that it's a good business. "Less expensive to build" also often means "easier to try." Some great businesses are expensive to build but are still worth building. (And to that, I say "Amen.") As Thiel points out, PayPal cost so much money to build that it likely would not have been built in today's climate.

He wants to find transformative companies with a great story--companies that seek to change the world, not build a feature and then exit. And personally, I find myself increasingly drawn to these types of entrepreneurs. I think there is something engaging, admirable, and fascinating about taking on difficult problems, the magnitude of which will deter many possible competitors. Those are the breakthroughs that disrupt markets and change the world.

I'm an entrepreneur. What should I build? -- Work on a personal passion. Solve a problem or build a product that you are passionate about. What do you know would be transformative? What are problems others are neglecting? These opportunities are open if a talented team will just try. Starting a company entails a certain amount of risk to begin with, so you might as well try to change the world. (And again, I say "Amen.") This clarion call, beyond really capturing my attention, evokes other great entrepreneurs that have shaped Silicon Valley--for example, in one of my favorite quotes, Steve Jobs said, "We're here to put a dent in the universe. Otherwise, why even be here?"

Personally, I think Thiel is onto something here. "Silicon Valley" brings about the thoughts and feelings that it does because it stands for a chain of people and companies who developed technologies and built companies that changed the world. Under the classic framework of whether your plan is really meant to be "an idea, a feature, a product, or a company," many of today's entrepreneurs are looking to build a feature and then exit. That's fine for capable teams looking for moderately successful exits, but I hope that for the rest of my career, I get to work in a Silicon Valley that, at the end of the day, still has entrepreneurs who aspire to change the world--and then do just that.

On the PayPal Mafia's stunning success in terms of technology investing -- Beyond their experience with PayPal, Thiel thinks the timing was in their favor. Flush with cash in 2002, when many established sources of capital were unwilling to invest, the PayPal founders were looking for deals when almost no one else was. And tech innovation does not always seek to accommodate VC investment cycles. He also thinks that the lessons from building PayPal paid dividends for the PayPal Mafia portfolio companies--when taking on a big problem or entrenched competitors, yes, it's hard, so get to work. (Hat tip to my friend, Zao Yang.)

On being nimble while you can -- Not long after its founding, PayPal was named one of the 10 "Dumbest Business Plans of 1999." Through being nimble and willing to change, they succeeded. Thiel points out that you can (and should) pivot while the company is young, but as the classic Valley refrain goes, you cannot change people. The lesson being: focus on the team. Are they passionate and committed? Do they want to build a robust company over time, or rush to scale? How will this group work together? And given his belief in long-term relationships among members of the founding team, I'm going to bet Thiel is not a believer in 2010's wave of co-founder search/speed-dating events.

On "social entrepreneurship" -- Social entrepreneurs like to say they are "doing well by doing good," and often that results in doing neither. (Think that comment elicited some gasps at Stanford University?)

On cleantech -- Thiel insightfully pointed out that in many cases, the business narrative of cleantech startups (read: saving the world) was so compelling that the companies were not vetted as aggressively as they should have been. Thus, some cleantech companies could raise large amounts of capital without the positioning to be world-class businesses. His point goes a long way to explain some of today's notable struggling firms, such as Solyndra. (I am fully cognizant that this topic could fill many books, so please forgive the brevity of its coverage here.)

On VCs -- Thiel said that PayPal had some "VCs from hell." Apparently, Max Levchin advocated for an "aura test," whereby if you don't like the person after the first 30 seconds, you shouldn't take his money. Thiel says this advice was ignored, and it almost destroyed the company. (Among Max's other wise, timely, and refreshingly irreverent advice for dealing with investors: "Figure out one thing each of your investors is genuinely really good at, and insist they help you with that. Among other things it will save you from their help in other areas." Well played.)

On "what was my greatest mistake?" analysis -- Thiel suggests that entrepreneurs should really ask themselves, "What was the biggest mistake I could have known to avoid at the time?" That is more useful than a blanket ex post analysis taking in all hindsight. What guiding factors could I have recognized at the time to avoid the negative outcome?

On cofounders -- It's best to cofound with person (1) who you know well that (2) holds different skill sets from you. Beyond that, redundancy leads to conflict--you and your co-founders should be working on different goals within the company.

On sacrificing your personal life to start a company -- You do not get progress without a certain amount of sacrifice, but you also should not be totally miserable. It is important to be centered.

Most common mistake entrepreneurs make? -- Doing what too many people are doing. Thiel urges entrepreneurs to avoid "crowd psychology." When you are starting a business, psychologically, you will crave reassurance. You want to have an open mind, but do not allow yourself to be deterred from taking on hard problems.

On the fundamental importance of the team -- Get the people right, or you will never recover. He points to Google as a great example of this--from day 1 to the present, Google has vetted its people very carefully, and the company has retained very high personnel standards throughout all of its growth.

Final advice -- It's not about categories. Look for a problem you're passionate about that no one else is solving.

And by the way, it seems Thiel has another trick up his sleeve, to be announced Tuesday night in San Francisco. His intense libertarian leanings have led him to say that freedom and democracy are no longer compatible, and thus he believes in seeking freedom by altering our reality through technology (e.g., Facebook, SpaceX, etc.). I am very interested to see what he envisions as the future of philanthropy.

In conclusion: Thanks again to Michael for asking me to post. I know this was a bit on the long side, but Thiel has a lot of great thoughts. If the Valley would heed his advice and step back to look at the broader landscape, I firmly believe it would enhance our chances of ensuring that Silicon Valley is tomorrow's center of broad technology innovation, not just yesterday's.