Liquidation preference

If I put a hundred million dollars into Snapchat today at a 3 billion dollar valuation, three things can happen:

Scenario A – BIG WIN

At some point in the future, Snapchat IPOs or gets purchased for more than 3 billion dollars. I reap the rewards through an appreciation of my stock price.  That’s what happened to everyone who invested during Facebook’s long run up.

Scenario B – SMALL WIN

Snapchat gets bought or IPOs for less than 3 billion dollars, but more than I invested in the company.  I’d actually do just fine. It’s not the result I was hoping for, but it’s actually not bad.  I get a hundred percent of my money back (assuming I’m the most senior investor) plus I also earned interest on my money every year.  While the interest rates vary, often they are as high as 8%.  So basically, my investment in Snapchat looks more like an interest bearing bond than anything else.

Scenario C – LOSS

It goes bankrupt or sells for less than the amount I invested in the company.  I lose my money along with everyone else.

***

And now things start to look a lot more sane from an investment perspective.  With acquisition offers already rumored around 3 billion dollars from Facebook, it’s hard to imagine a world in which Snapchat dies so dramatically such that that the acquisition value dropped below a hundred million dollars.   I won’t say it can’t happen – but that’s effectively the bet I’m making as a late stage investor.

So now you can see why these valuations get so high.  It’s because the risk profile of the last money in is actually pretty low.  They can afford to get into these bidding wars because they have the confidence that they are likely to at least get their money back, and yet they still get upside exposure if things go extremely well.
 

Good explanation of liquidation preferences and how they influence technology investors' tolerance for high valuations. Generally, if you can play any financial game where your downside is getting your money back and your upside is many times your investment, that's a good game to play. Your average retail investor is shut out of that game, however.

The economics of MOOCs

But.. For now, Moocs are a quite high fixed-cost business. Putting a class up in a mooc is not quite as much work as writing a textbook, but it's nowhere near as easy as teaching a new class. If you're tempted, beware!  Preparing, taping, editing and uploading a lecture is not the same as walking in, telling a few jokes, and getting through the week. Fixing anything that went wrong or updating is costly too.

Part of the high fixed costs lie in the limitations of the software. This is still version 1.0 stuff. Quizzes and assessments are key to the success of a class, and these are still particularly rudimentary. On Coursera, really, not much more than multiple choice and numerical entry works well.  Coursera software does not allow parts to questions, or students to try question 1, get a hint, solve it, see the answer,  and then go on to question 2 which builds on question 1. You can't even cut and paste pictures. As an instructor, taking those "prove x theorem" or "how do you resolve y puzzle" problems and turning them into meaningful multiple choice or numeric entry questions is the hardest part. Artificial intelligence programs reading text entries, guiding the student to different material based on his misunderstandings, and so on... this is all personal flying jet packs dreams.
 

John Cochrane on the economics of MOOCs. He speaks from experience, having taught one himself.

The first generation online courses I've taken are still in a very rudimentary form, perhaps because they are quick and dirty ports of real-world classes. They recall some of the first generation mobile apps which were simply wrapped websites. If you were to build a class from scratch for a MOOC, as an experience, you'd make many different choices than if you were trying to just convert a class that was taught in the traditional sense. Just as native apps have come to dominate the mobile phone experience, the next generation of online courses, built from the bottom up to be an online experience, will make today's online courses look primitive. The issues, of course, is that the tools are limited so far, and building such an experience is a high upfront fixed cost.

Companies like Coursera and Udacity need to arm instructors with the tools to build a great experience at a lower investment of time and money. That will come. The benefits come downstream: once constructed, an online course can be spread to a near infinite number of students at a fractional marginal cost. This has always been the chief appeal of online instruction to me, the ability for great instruction to achieve massive leverage and scale.

Of course an online course can't replace an intimate lecture taught by a great professor at a prestigious school like Stanford or Harvard or one of our nation's top universities. That's not the point. Most kids in the world, for a variety of reasons, won't ever have the opportunity to get that level of instruction. Many will get either poor instruction or none at all. For them, the difference in educational capital from a well-constructed MOOC will be massive.

We're still in the early early stages of the impact of MOOCs. It's likely their early struggles will have people dismissing them prematurely. In the long run I'm still quite bullish on their societal impact.

High Maintenance gets second season courtesy of Vimeo

The acclaimed web series High Maintenance got picked up for a second season with funding from Vimeo. This is Vimeo's first foray into an original web series.

Everybody in tech is getting into the original content game. That's the nature of video and TV: licensing is expensive and usually not economically attractive (see wholesale transfer pricing), so eventually players of sufficient audience look upstream, into financing their own content so they can capture the lion's share of profits available in the first window.

Seems tough to do with a one-off series of niche appeal like this, however.

The Late Stephen Colbert

If Colbert’s interviews—meta-interviews, really—tend to be a little edgier, a little more unpredictable, than either Stewart’s or Letterman’s, one can’t help assuming that it’s because they are conducted by The Character, not the everyday husband and father. What will happen when the interviewer is Stephen Colbert, not “Stephen Colbert”? If an E! Online compilation of Colbert-as-Colbert is any guide, he’ll be charming, intelligent, and amusing. But the hint of lethality, if not altogether gone, is likely to be attenuated. The Character hasn’t had to worry about being likeable, any more than Elmer Fudd did. He’s been free to go places that an actual person can’t. The Character’s very one-dimensionality has given his interviews an interestingly three-dimensional quality.

...

An unfortunate atmosphere of reverence surrounds these legacy late-night TV jobs, as if Carson, Letterman, Paar and the rest were Popes, or even saints. The shows are encrusted with tradition and ritual. Compared to what Stewart and Colbert have wrought on Comedy Central, the offerings on the old three-letter networks, no matter how many Jimmys they’re fronted by, feel tired.

Stewart will now have to soldier on alone. The immediate loss is for liberals, for whom “Stephen Colbert” has played a unique role as a fifth column. The Character has been a miraculous and unparalleled intellectual and political achievement, sustained for a very long time at a very high level. But if the intelligence, discipline, and hard work that Colbert invested in The Character can be brought to bear on revitalizing the variety show, then the polity’s loss may turn out to be the culture’s gain. If Colbert can truly reinvent the genre, if he has the freedom and the inclination to blow it up and build on the rubble, then perhaps The Character will not have died in vain. For the moment, though, excuse me while I put on my black armband.
 

Hendrik Hertzberg on Stephen Colbert's shift to Late Night to take over for David Letterman. I'm late on this one, but I have to agree with Hertzberg that I'm saddened to lose Colbert the Character.

I understand the financial appeal of the late night circuit, and I'm happy for Colbert getting to cash in on his amazing run but culturally the late night talk shows are a wasteland, more and more irrelevant by the day in this new age of media. Jimmy Fallon and Jimmy Kimmel grasp to produce a bit of cultural residue by coming up with sketches (like this or this) that will play well on YouTube for days after they've aired.

Ironically, in doing so they were chasing in the footsteps of Colbert and Jon Stewart. Now the court jester is trading in his clown shoes for the royal robe. I fear I'll miss the days when he was pointing out the emperor had no clothes.

Well, we'll always have Colbert's hosting set at the White House Correspondent's Dinner, still one of the bravest comedy routines ever.

Discharge thy secret!

When it came time to adapt Frozen, the fifth-highest-grossing film of all time, for foreign markets, Disney made the odd selection of Modern Standard Arabic over the more commonly used dialect of Egyptian Arabic, which previous Disney films had been dubbed into.

It’s tricky to describe the quality of a literary text in a formal language to a speaker of American English or any other language that does not contain the same range of linguistic variety as diglossic language families like Arabic, Chinese, and Hindi. One way to put it is that Modern Standard Arabic is even less similar to regional Arabic dialects than the English of the King James Bible is to the patter of an ESPN sportscaster.

The Arabic lyrics to “Let It Go” are as forbidding as Elsa’s ice palace. The Egyptian singer Nesma Mahgoub, in the song’s chorus, sings, “Discharge thy secret! I shall not bear the torment!” and “I dread not all that shall be said! Discharge the storm clouds! The snow instigateth not lugubriosity within me…” From one song to the next, there isn’t a declensional ending dropped or an antique expression avoided, whether it is sung by adancing snowman or a choir of forest trolls. The Arabic of “Frozen” is frozen in time, as “localized” to contemporary Middle Eastern youth culture as Latin quatrains in French rap.

Why Disney decided to abandon dialectal Arabic for “Frozen” is perplexing, and the reaction has been mixed. Many YouTube viewers are annoyed, with some fans recording their own versions of the songs in dialect. An online petition has called for Disney to switch its dubbing back to Egyptian Arabic, plaintively wondering, “How can we watch ‘Monsters University’ in the Heavy Modern Arabic while we saw the first one in Egyptian accent that everybody loved…?”
 

The subtitled video is a hoot.