Podcast: Play in new window | Download

We all know Google’s corporate philosophy is “don’t be evil, ” but what does that really mean? Is it okay, for example, to be just a little evil, rather than bad to the bone? Or is it okay to enable evil in others? The latter case certainly represents the minimum coefficient of evil I see operating at the Googleplex now that I know the search giant is involved with the Online Lenders Alliance. You know, payday loans.

Payday loans are cash advances provided to consumers until their next pay cycle secured by post-dated checks with most advances not exceeding $500. These loans are for people who can’t find money any other way to buy milk for their kids. Very few get payday loans to buy Springsteen tickets. And with interest rates that often exceed 400 percent annually, you can see why I might think payday lenders are evil.

Get behind on a payday loan and most borrowers never catch-up.

The Online Lenders Alliance is a trade group comprised mainly of payday lenders, though it also involves call centers, collection agencies (natch), lead-generation companies, credit rating agencies (though not the ones you have heard of)… and Google, which had a booth last month at the OLA convention in Chicago.

The idea of Google having a trade show booth at all surprises me. Remember this is no-touch, algorithmically-driven Google, which generally doesn’t like to get involved in public events involving, well, people.

But Google was involved with the OLA and I have to wonder why? Were they there just to sell advertising? Certainly payday lenders have migrated en masse to the Internet and do a ton of business through Google ads. But that wouldn’t necessarily lead inevitably to a trade show booth. Auto parts vendors sell tons through Google, too, but I don’t see Google on the exhibitor list at the big Specialty Equipment Manufacturers Show (SEMA) in Las Vegas.

Maybe Google was there as an aggregator and seller (or even buyer) of consumer data. This type of Internet lead is an underwriter’s dream because once consumers develop an “I no longer care” attitude they supply more private data (including Social Security numbers) as well as more general data — up to 80 fields worth! Google might want to buy that sort of information to add to what they already know about our searching and other online habits.

Whatever Google’s motivation, it is pretty clear the company views payday loans as a special case. When I did a Google web search on the term “payday loans” for example, the search results placed the uniformly negative news items near the bottom of the results, below the fold as we used to say in the newspaper business. Similar web searches on the terms “mortgage loan” and “auto loan” put the news in each case near the top of the results, significantly above the fold where it was more likely to be seen.

Why would Google do that? Payday loans are despised by consumer advocacy groups, governments, and my Mom, alike. Nobody likes payday loans, except of course the companies that make billions providing and servicing them.

There are lots of big companies that benefit from payday loans. If you wonder where payday lenders get their money, for example, it is from the same banks where we have our checking accounts. The biggest backer of payday lenders is reportedly Wells Fargo.

But enough of this speculation! The best way to find out why Google was exhibiting at the OLA show would be to simply ask them, which one of my readers did as favor to all of us. And the answer he got from folks manning the Google booth was surprising — or at least it surprised me. He was told “the (payday loan) industry is ripe with inefficiencies, shady practices, and shady people. Coupled with overwhelming consumer demand, Google believes it can right these inefficiencies, provide better transparency, and ally with consumer protection agencies. ”

If I heard correctly, that means Google is thinking of entering the payday loan business.

I can’t tell, is that evil or not?

Like a lot of big tech companies, Google is sitting on a ton of cash — $30 billion — that is just dragging-down earnings because interest rates for non-payday-type investments are close to zero. That’s 10 times the total float of the entire payday loan industry! If Google took even half that money and started lending it online, it would drive payday interest rates sharply down to, say, 20 percent — still an order of magnitude better than an Apple earns on its stash of cash.

Earning 20 percent interest on $15 billion would increase Google’s profit by $3 billion per year for an increase of almost 30 percent.

The impact of Google entering the payday loan business would reverberate through the sub-prime lending industry, affecting many other types of loans and credit cards ruthlessly aimed at the the most vulnerable.

Maybe it is not so evil after all, but I’d say the jury is still out on that one.

I have long expected that we’d all be metaphorically signing-over our paychecks to Google. I just didn’t expect we’d be doing it literally, too.

Podcast: Play in new window | Download

Driving around America for nine weeks and more than 10,000 miles, I’ve had a chance to see how our economy does and doesn’t work. The startups I visited were all good companies — reader favorites, after all — so they tended to shine. And their glow was generally green and even a bit altruistic, yet still based in for-profit philosophy. These are the kind of companies that create industries, build or renew cities and industrial centers — companies that create jobs in the kind of abundance needed to keep our nation prosperous. Yet in terms of government policy, it is as if they are unknown. The Obama Administration just successfully passed important small business legislation, for example, that has no value at all for tech startups. This probably shouldn’t surprise us: former President George W. Bush was clueless about this stuff, too.

The good news is that none of this really matters a lot: tech startups will continue to happen in great numbers no matter what Congress and the White House do. The bad news is neither institution would know a tech startup if they saw it and there probably are ways that government could help but won’t.

The new small business legislation intended to support startups is based entirely on debt — getting banks to lend money to small companies. But the only kind of debt that most tech startups know is credit card debt. Little tech companies grow by selling equity, not borrowing money. Short-term debt goes on plastic at 18 or 23 percent because no bank has — or will — lend to real tech startups in any significant amount.

They’ll finance new Burger King franchises, but lend money for electric cars or new kinds of data storage or — shudder — software? Forget about it.

Presidents Obama and Bush didn’t know this, Fed chairman Bernanke doesn’t know it, nor does Treasury secretary Geithner. None of these men have a minute’s experience with tech startups, yet our economy is almost entirely dependent on those startups for real recovery.

So since these distinguished bozos don’t know what to do, I’ll just throw out a couple ideas I came up with this summer on those long drives from town-to-town with the kids and Mary Alyce asleep in the back of the RV.

While equity is fine, debt is better: banks should lend to tech startups. They don’t because they can’t tell a good one from a bad one. They should because doing so would be good for both the economy and America. The way to do so is by lending not to individual companies but to baskets of companies. If banks don’t have the confidence to create such baskets themselves, heck, I’ll do it. I’ve visited enough startups to tell with a 85 percent certainty whether they have what it takes to succeed.

But even lending to a basket of companies that has a near-100 percent chance of delivering 3-5X on each loaned dollar, the banks still won’t do it because they are cowards lacking any — any — moral fiber whatsoever. They won’t do the right thing even if I make it low- or no-risk, because they don’t know what a right thing looks like anymore.

This is where there becomes a true role for government — to require that banks lend to those baskets of tech startups I put together. Make lending to tech startups a condition for even having a banking license.

While this make seem a wild-ass idea, isn’t that the essential nature of licensing? IF you want this privilege THEN you assume this obligation.  And with tech startups representing only $20 billion in a $20 trillion economy, what’s the big deal?  That’s the very chump change that can lead us out of recession and deflation and back toward world leadership.

Still they won’t do it.

Why?  Because it’s too simple, yet not at all simplistic. But even more so because larger companies and institutions will lobby against it without even knowing why they do so.

So given that these no-brainer solutions are going to inevitably be ignored in favor of slap-dash programs that will benefit only special interest groups and not America with a capital A, I’ll throw out one last idea that just might make the cut, because it relies entirely on greed and self-interest to succeed. Those are two commodities we appear to have in limitless amounts.

We have here a syllogism, so stick with me:

1 — Since the Reagan era and the Laffer Curve we’ve time and again relied on tax cuts for the rich to stimulate our economy, the idea being that the money saved from taxation would trickle down to the rest of the population selling Big Macs and handing out shopping carts at WalMart.

2 — Alas, Laffer was wrong, in large part because rich people save most of their money, they don’t spend it, and spending is what expands (or in this case re-expands) economies.  Hence the liberal idea of tax cuts just for poorer people who will actually spend their tax savings buying Big Macs and stuff at WalMart.

3 — Yet rich interests always win in these things because they are smarter about buying influence.  This is a simple reality that is unlikely to change, so forget about the poor people.  But cutting taxes for everyone is grossly inefficient as economic stimulus compared to cutting taxes for the non-rich.

4 — Rich interests have also shown an amazing willingness to do the most arcane and complex things to avoid paying taxes.  Remember the tax shelters of the 1980s?  Sheesh!

5 — Here’s the boffo payoff: the logical solution to restarting the economy, then, isn’t any of those crazy ideas like flat taxes or taxes on consumption.  What will actually work is a short-term tax (or tax credit — they are the same thing if you squint) on savings.  Forget about accelerated depreciation — make all non-reimbursed expenses of any kind 100 percent deductible in the current tax year.

It’s ass-backward, I know, but it would work.  Give rich people a short term incentive to spend like poor people, then phase it out over time.

If we are metaphorically in the same position as FDR in 1938, this wacky policy would please the right while giving a financial boost equivalent to World War II but without the war.

Recession over.

Podcast: Play in new window | Download

Shortly after our Startup Tour began this summer, Heath Ledger died. No, not Heath Ledger the actor, who died a couple years ago of an accidental drug overdose — Heath Ledger, my four year-old Garmin NUVI GPS who spoke with an Australian accent. My Heath had been going quietly insane for some time. This is his story.

It seemed like nothing serious at first — a forgotten route, a missed turn, some confusion about where home was. Heath was still Heath but maybe a step slower than in his youth. Then he started routing us gratuitously, sending us to places we didn’t want to go. After that came the endless loops, which with a driver like me sometimes aren’t noticed until the third lap. Heath, in advanced age, was experiencing dementia. It’s not supposed to work that way (this is digital of course — perfect) but it was.

Drive across America visiting little companies in little cities and your GPS becomes you best friend. Only this best friend had forgotten my name.

Time for a new Heath.

Bought on sale for $134 at Best Buy somewhere in Illinois, my new Heath is a NUVI 255 with a bigger screen, faster processor, and overall badder attitude than the Heath he replaced. After 10,000 miles and almost 200 hours of driving together, I know this new Heath very well. And I don’t always trust him.

It’s like playing a video game so many times to where you come to understand the flow of the game and how it functions on a level maybe even the programmers didn’t consciously know or intend. That’s how I understand this new Heath, my driving partner and sometime enemy. He doesn’t lose his mind like the Heath he replaced, but he doesn’t always like me, either.

Indulge me while I explain my understanding of Heath’s routing algorithm.

To my new Heath, faster means faster and shorter means shorter no matter how stupid the route turns out to be in human terms. So if you tell Heath you want the shortest route and there are many possible choices but one is 40 feet shorter than the others despite having 60 percent more turns and stops, Heath will save the 40 feet. Same for faster, even if faster requires cutting a corner by taking a one-lane dirt road in your 34-foot RV. The speed limit in his database says 65, after all, even if you can only go 30.

Heath has done both of these things to me.

One of the joys of GPS, of course, is its nonjudgemental nature. Heath rolls with the punches no matter how many bonehead turns I make. But even in his compensation for my mistakes he mocks me, pulling a fast one by, essentially, maintaining two sets of rules.  His jabs are subtle.

You see Heath has two routing modes that I don’t know what they call in Kansas where Garmins come from, but I call the two modes smart ass and dumb ass.

Smart ass mode is invoked whenever I make a wrong turn. “Recalculating… As soon as possible turn around and go back,” says Heath. Or he’ll say, “Recalculating,,, As soon as possible make a U-turn.” In smart ass mode, you see, Heath questions my judgement, undermining me in front of my children.

But Heath never second-guesses himself, because if he isn’t recalculating Heath never looks back. He doesn’t even appear to know there is a road behind him.  In this mode Heath is like an Italian Formula One driver who throws away his rearview mirror because what‘s behind him doesn’t matter. That’s dumb ass mode where Heath could backtrack half a mile saving half an hour but won’t ever do that. I first realized this in some small town when I got off the freeway for gas and — rather than put me right back on the highway a hundred yards from the pump — Heath guided me slowly through town before putting me back on the very same highway.

As the expression goes, familiarity breeds contempt. Ask Heath for a handful of distances, like how far it is to the nearest Mexican restaurant, and he’ll instantly spit out half a dozen places within a few miles. Not so fast: those distances are as the sombrero flies — un-routed. That 5.7 miles to Dos Perros in Durham, North Carolina could in fact be 10 miles or even 20. All you can know for sure is that it isn’t 5.7. Not even close.

GPS helps us eventually find places while, at the same time, putting us in our places. It’s a love-hate relationship, at least for me.

Podcast: Play in new window | Download

So the phone rings at a big publishing company in New York. “How long is a book? ” asks the caller.

“Well it varies from book to book and genre to genre,” explained the publishing company receptionist.

“This is a novel. How long is a novel?” the caller asked.

“That varies, too, but many of ours are around 80,000 words,” the receptionist said.

“Thank God, I’m finally finished!” said the caller.

By the same token, how much money does it take to start a technology business? I’ve just spent the summer with more than 30 startups and can tell you the amount varies greatly — more than you could even imagine.

In the simplest sense how much money it takes to start a technology business depends mainly on how much money you have, because it generally takes it all. But all can vary a lot.

The most money raised by any of the Startup Tour companies we visited this summer was $70 million. The least was $5. There were plenty in the $1+ million range but I’d guess the median was around $40,000.

There are plenty of companies that claimed to have not raised any money at all, but that’s not true. The founders of those companies generally went without pay for six months or more, so their companies were self-funded with significant dollars. That makes the $5 company all the more amazing, because it really did start with just $5 — for business cards at Kinkos — and was profitable before the end of its first day in business.

Remember these are companies outside Silicon Valley. Most of the companies we visited this summer had never even met a venture capitalist. Most were funded by family and friends. A surprising number relied on government funding, primarily in the form of Small Business Innovation Research (SBIR) grants.

If there’s a role for government in encouraging tech startups, SBIR defines that role. For those unfamiliar with the SBIR program, federal agencies that spend more than $500 million per year on outside research are required to set aside a small percentage (I think it is two percent) of that money for research contracts with small businesses. The two-phase contracts are for $100,000 and $600,000 to develop technologies of interest to the government. But while the government gets use of the technology, they don’t get to own it or even have equity in the developing company, so from an entrepreneurial standpoint this is ideal.

From what I have seen, the SBIR program is modest, yet extremely successful at encouraging innovation. Perhaps it should be expanded.

Yet that’s about as far as federal success in this area goes. None of the startups had done business, for example, with the Small Business Administration or with SBA lenders. For technology at least, this more traditional program is a non-starter, probably because it is hard to explain to a bank the value of software.

A lot of what we looked at was software, but home equity loans also funded a robotics company and a solar company and probably other companies we didn’t even realize were built on housing bubble money.

The point is that it doesn’t take a lot of money — certainly not Silicon Valley-type money — to start a very fine company. The trick is to either do-it-yourself or do-it-offshore, with the offshore model oddly in decline, probably since there are so many out-of-work engineers in the USA.

One of the more surprising conclusions of the summer is that many of our companies saved so much time by not looking for money that they ended-up not needing the money they might have raised.

Let me explain this last point in more depth. If you spend three months writing business plans and visiting VCs before you have a prototype, then you are three months late (and $X behind) before the first line of code is written or first piece of metal cut. Yet you had to eat during those same three months. Better to go for 90 days on savings or on a 30-second pitch to your rich uncle than to waste three months looking for VC money.

Get a good prototype and the money may come looking for you.

And certainly six months is enough time to know if your idea is going to work or not. So six months of income is the most you should expect to raise or spend from savings.

I don’t care if you are inventing a frigging immortality drug, the same funding rules apply, at least outside Sand Hill Road.

We visited a very promising pharma startup, for example, that had so far spent only $30,000. Yes, a lot more money would be shortly needed for large animal and human trials, but the preliminary work was done, their basic IP was protected, and no equity was burned in the process.

It’s painful for them now, but in the end each of these companies will be glad they were so careful with their spending.

Not that they all were so careful. Home equity money circa 2006 was so abundant many of our founders made stupid mistakes. But to make our list they also recovered from those mistakes. And when you look at the dollars that actually bought the right stuff, they generally came down to that same $30-40K.

So how much money does it take to start a technology company? Less than you think. Maybe even less than you have.

Podcast: Play in new window | Download

The Cringely (Not in Silicon Valley) Startup Tour is less than two weeks from being over yet where is all the video? It’s coming, I promise.

We have so far visited companies in New York, Massachusetts, Vermont, Pennsylvania, Ohio, Michigan, Indiana, Illinois, Missouri, Minnesota, North Dakota, Colorado, Washington, Oregon, California, Arizona, and are now in Texas. Tennessee, Alabama, Georgia, and North Carolina are yet to come. We’ve driven 8,700 miles with about 2,000 to go.

That’s a lot of driving. And there’s the problem. It is hard to shoot video all day and evening, write a blog, be a husband and dad, drive an average of 300 miles per day and do a fair job of editing video segments for the web. Something had to give. And that something has clearly been the video.

Fortunately, I don’t think it will matter much in the end. We’re starting to hack away at the more than two terabytes of video shot so far and will begin posting segments shortly. Once they start they’ll continue through the rest of the year because I’ll be editing, not driving.

This whole project began last summer when we had such a good time driving our RV across the country that my young and lovely wife said, “Let’s find a way to do this again next year but this time get paid for it.” And so we did. But the difference between last year and this is not just the money, it’s the work we’ve had to do to earn the money. TV no longer holds any glamor for my kids.  This has been no vacation.

But it has been an eye-opening experience. I’ve worked on-and-off in tech startups all my adult life, but that didn’t prepare me for an intimate look inside dozens of startups. The role of these companies in our economy and culture has been way underestimated. The general media have little sense that these companies even exist and the tech media, for the most part, doesn’t understand the details. This project is something that has never been done before and may go a long way toward helping America rediscover one of its own greatest strengths. I hope to be doing Startup Tours for many summers to come.

Just don’t ask me to drive.