Thursday, February 17, 2011

Predictive Analytics | Ownership & Use of Data

If you click on the by-now very familiar Facebook "Like" button above, which I hope you will do by the way, when you next visit your Facebook page you might see ads for attorney services or invitations to startup-related workshops. That's predictive analytics in a nutshell.

With the explosion of data (which is now cheaper than ever to store and to process), predictive analytics has become a hot and growing field. The data is being put to uses as diverse as forecasting traffic, recommending movies, predicting clicks, preventing fraud, and even classifying a fading pitcher.

It was on the topic of predictive analytics that MIT/Stanford Venture Lab (VLAB) held a very well-attended and insighful panel discussion, featuring Omar Tawakol of BlueKai, Scott Burke of Yahoo, Matthew Barkoff of Badgeville, and Theresia Gouw Ranzetta of Accel Partners, with Michael Driscoll of Metamarkets serving as moderator.

Without attempting to provide a word-for-word transcript of the presentation, let me cover a few of the interesting points that stuck with me as well as my own thoughts/interpretation.


Before predictive analytics, how did advertising companies know who to target? They used proxies. A zip code for an affluent neighborhood may serve as a proxy for the kind of discretionary income that the homeowners have in that neighborhood. A TV show might be a proxy for the target viewer of that TV show. So companies would sell (and still do) direct mailing packages into specific zip codes based on the demographics of those zip codes, or offer advertising time during TV shows, as a few examples.

But how much do you really have in common with your neighbors in terms of the kinds of products and services that you are interested in? Or with the other viewers of your favorite TV show? Not very much I would guess. Proxies are obviously a very imperfect method of directed marketing.

Cue: enter predictive analytics to save the day. :)

Data Collection

Predictive analytics obviously needs data to feed its algorithms. So where does that data come from?

A portion of the data is collected by online service providers.

When you search on Yahoo or Google or Bing for designer shoes, baby cribs, corporate gifts, European cruises, or wedding photographers, the company providing the search engine capability aggregates that data to know what your interests, hobbies, and buying patterns are in order to place more relevant and therefore more expensive advertising in front of you while you search.

Amazon, formerly a large online book store and now a supermart for everything under the sun, from video-on-demand to Halloween costumes to high-end electronics, amasses a huge amount of data over time about the shopping habits and preferences of its frequent shoppers. [Though to be honest, I have not seen them put the data to good use with their shopping suggestions, which never seem to inspire, just mho.]

And finally, social networks like Facebook or Yelp know as much as you are willing to share about everything in your life from where you went on vacation, to your favorite restaurants, to the kinds of networking events that you attend.

The common trend in these three examples: the data is provided by the users, whether consciously or not.

And I, for one, don't see anything nefarious in this. [Gasp!]

Rather, I think of it as a kind of implicit pay-to-play. Only the currency to play isn't cash; it's personal information.

Which leads us to the next point.

Data Ownership

Following the logic from above, if the price for using free services like Facebook, Yelp, or Google search is the personal data collected while using the services, then ownership of the data rightfully transfers to the service provider at the time of use.

However, because the pay-to-play is only implicit and because of the... well... rather personal nature of personal information, the transfer is probably more akin to a limited license than a full assignment, to throw around some legal jargon.

[Please note that the theoretical legal framework I am suggesting is artificial and fictional, and is only meant to faciliate discussion, not provide a legal opinion on the underlying transactions. :) ]

Data Use

If, following the premise above, the license is indeed limited, the big question is, what can the companies that collect the data do with it?

And I think the answer is, to the extent that the data is anonymized and handled properly and securely, they can sell it to advertisers/advertising agencies (via data marketplaces like BlueKai, for example). The caveat for data being "anonymized" and "handled properly" and "securely" is supposed to protect against broad typoes of misuse of the information, including identity theft.

But short of that (misuse that is), how bad is it really if the marketing aimed at us is (even incrementally) more relevant to our interests than the same amount of marketing that is instead total junk?

Your Options

Not every website with let you do this, but a growing number of websites, Yahoo, Google and Bing among them, will let you manage how that website perceives your interests (and, therefore, the kind of advertising you might expect to see).

If you are interested, at the very bottom of the Yahoo home page, click on "About Our Ads" and then proceed to the gray "Manage" button to see the kind of categories Yahoo is using to assess relevance in placing ads on your pages. Very similar process on Bing. For Google, click on "Privacy" at the bottom of the page, then on "Ads Preferences Manager."

The Future

I don't have a crystal ball, but I would not at all be surprised to see more companies allowing greater transparency and user customization of interests used as a basis for interest-based advertising. Maybe that's the next evolutionary step in advertising, in fact, following proxies and black-box predictive analytics.

Inna Efimchik

Emergence Law Group  Emergence Law Group, specializing in assisting emerging technology companies in Silicon Valley and beyond, provides incorporation, financing, and licensing services as well as general corporate counseling.

Tuesday, February 15, 2011

Entity Formation | Do You Really Need an Attorney?

The early-stage startup community is about being lean and about being frugal. It's not 1999 anymore. Company founders have to be realistic about the amount of time they may need to stay in operation before getting funded and they have to stretch their bootstrap dollars as far as possible.

And the best place to save money is eliminating obvious overhead items, like legal fees, right?

I talk to a lot of entrepreneurs in the idea stage, pre- company formation. "How early do I need to engage an attorney?" I am often asked. "Do I really need an attorney to form my company, when I can get incorporated on Legal Zoom for a few hundred dollars?"

The answer to the first question is easy--start working with an attorney as early as possible. It will help you avoid a number of pitfalls to which first-time entrepreneurs especially are very susceptible.

As far as the second question, here's my take on it.

Legal Zoom will get you incorporated, that is true. And, by the way, you could incorporate your company yourself, too, for even less than the cost of Legal Zoom. And get an EIN online in 10 minutes (maybe even less). Some big law firms have been adding their entity formation forms to the public domain, so the forms are out there for the taking. Why?

Because the reason to retain a startup lawyer isn’t because they can file a standard piece of paper on your behalf. It’s because with the help of a good startup lawyer your business has a higher chance for success.

As far as Legal Zoom goes, keep in mind that they don’t actually issue shares. Founders should be issued shares as early as possible, while the value of the company is at its lowest. And the shares they are issued should be restricted shares that vest over time (4 years is fairly standard). They should also be subject to the company’s right of first refusal. In addition, the founders should transfer their intellectual property to the company at the time of the issuance of the shares and in consideration therefor.

In order to issue shares subject to these restrictions and conditions, the corporation needs to execute stock purchase agreements with the founders. Legal Zoom, on the other hand, will provide you with board resolutions authorizing the stock issuance and blank stock certificates, with the idea that you can issue those to yourselves.

At the time when the corporation issues shares to the founders, in addition to building in the provisions discussed in the previous paragraph, the corporation needs to make a securities exemption filing in California and the founders need to file an 83(b) election with the IRS. Legal Zoom does not handle any of that (because they haven’t issued the shares).

The bottom line is, when you retain corporate legal counsel, you are hiring an experienced advisor who will guide you and help you avoid underwater rocks. If you use Legal Zoom to incorporate, or if you incorporate yourself, you still need to go to an attorney to take care of other "formation" matters.

Inna Efimchik

Emergence Law Group  Emergence Law Group, specializing in assisting emerging technology companies in Silicon Valley and beyond, provides incorporation, financing, and licensing services as well as general corporate counseling.