Food, Shelter, iPad

The party, we are told, is over. Or maybe it isn’t. Or maybe it is.

A week ago, Redfin was racking our brains over how we could possibly spend more money to drive higher revenue growth. When capital is plentiful, profits become less important to any business. You make hay while the sun shines. You experiment in costly ways with marketing campaigns, changes to the service, speculative new projects. If you need more money, you can get it. The advice of our investors at Redfin as recently as last Friday was, overwhelmingly, to stay aggressive.

That was then, this is now. After a week of terrifying stock-market swings, we still have plenty of money and the moxie to invest it. We’ll still be aggressive. But we’d be foolish not to pause for a moment to rubber-neck at the carnage on Wall Street, thinking carefully before embarking on a strategy that might require us to raise more capital.

Other companies are in the same boat. Already, nine public offerings were canceled or delayed this week. Regardless of whether the markets are up today or tomorrow, market volatility spooks banks from under-writing risky deals, and that in turn gives venture capitalists pause before tying up money at crazy prices in a private company.

But even if prices moderate a bit, that doesn’t mean we’re headed for a bust. Technology companies aren’t inert assets that go up and down on the tides of speculation like a chunk of wood or, say, U.S. real estate. They can rise or fall in value on their own, depending on their ability to get customers to pay more or less for online services & gizmos.

And my guess is that customers will continue to want to pay more for online services and gizmos, even in hard times. Just take for example the iPad. Launched in March 2010 with U.S. unemployment near 10%, the iPad was the ultimate extravagance. No one needs an iPad and anyone who does could easily buy alternative tablets for half the price. Yet iPad sales are through the roof. What this tells us is that when consumers pare back, their list of absolute essentials now consists of food, shelter, Internet.

And this is why, in talking to folks at all sorts of high-tech startups, you hear the same story of rising sales, even as worldwide consumer spending sags. Even in a recession, the only problem most consumers have with the Internet is that they can’t get enough of it.

The crucial difference between the current wave of startups and the one we saw in 1999 is how much better we now are at making money, not just noise, from this Internet traffic. On almost every front, today’s high-tech startups have become ferociously disciplined about profits, because we were born into the fire of a recession and learned to grow in a recession:

• through viral websites that can grow without advertising;
• via exquisitely calibrated email campaigns that hit you every day, not every month;
• through a massive investment in data analysis to identify profitable customers;
• with virtual currency, in-app purchases, subscriptions, online stores and micro-payments; and
• through a belated realization that the best way to make money is to ask your users directly for it, as Redfin, Zynga, Gilt, Groupon, Flickr and a whole new wave of e-commerce sites now do.

That’s why Zulily scored a $700-million valuation yesterday, and why the company richly deserved it. Online business and high-tech companies may grow more cautiously in this new environment — but they’ll still grow. And the sky may fall on Wall Street, but that’s only because they’ve got nothing but hope to hold it up. When big storms come, it’s better to be a builder than a speculator.

On Monday, the Stock Market Lost $1 Trillion. And More People Bought Homes.

The New York Times called over the weekend, for a front-page story about how consumers are reacting to Standard & Poor’s downgrading of U.S. debt and a bear run on the stock market.

I was alone with my kids who were going bananas all around me. The story was going to print in ten minutes, and my laptop was out of batteries. I remembered the last crisis in 2008, when our phone rang off the hook with customers walking away from pending sales and $30,000 in earnest money — and thought “here we go again.”

Then I said, “demand is falling off a cliff even as we speak.”

I hung up and plugged in my laptop. Because we store every tour request, offer, listing consultation and agent query in our customer database, I could quite easily determine, in real-time, if demand was falling off a cliff.  And the thing was, it wasn’t.

I knew that it would, but it hadn’t yet. I sat there for a beat wondering what to do, then called the reporter back and said I was wrong. I felt very silly. He was very gracious about it, and called the New York desk to pull my quote from the story.

I came into work this week just waiting for the other shoe to drop. But it hasn’t. For the first time ever, Standard & Poor’s downgraded U.S. debt on Friday night. The stock market lost $1 trillion in value Monday, the largest drop since the financial crisis.

But if you compare Saturday – Monday of this week to the same days of the week over the last eight weeks you find that signed offers actually increased 7%, with a nice strong kick on Monday. Nothing apparently phases the American consumer anymore.

The number of new customers contacting us for the first time decreased 4%. But the truth is we expect new customers and signed offers to decrease even more this time of year, just because the summer home-buying season is winding down. Every year, the number of customers making offers peaks in late May or June, and closings peak 45 days later in July.

I called a few Redfin agents to understand what home-buyers who are writing contracts and touring properties could be thinking.

Febe Cude said that her customers fell into two groups. One group of folks, mostly at the beginning of their home search, needed to sell stocks for their down-payment and had now called off the search entirely. But the second group is moving ahead. “On Friday, they were thinking of ways out, but now with interest rates falling, they’re feeling comfortable again.”

Trevor Smith described the same reaction, saying that buyers who normally might have changed plans decided they had to stay the course because rates are so low. Kenny Whiteside described his customers as scared, angry and anxious. Some are stepping back, he said, but some are stepping in, rushing to complete deals before their financing falls apart. A few have landlords kicking them out of their rental in favor of family members, so they have nowhere else to go.

We aren’t sure what will happen next. But the damage report we expected to get on Monday here at Redfin wasn’t a damage report at all, which we thought was noteworthy in and of itself. (Many thanks to Pete Ziemkiewicz for pulling the numbers.)

The Only Thing Silicon Valley Really Needs from the Government

With America’s economy in crisis, Silicon Valley has emerged as a new authority on how to create jobs. Mary Meeker at Kleiner Perkins has analyzed the U.S. government as if it were a high-tech business, arguing convincingly for a reduction in spending, while mostly restricting her comments on revenue increases to the less-helpful claim that not enough poor people are paying taxes at all.

Many in Silicon Valley share the point of view of my friend Prasanna Srikhanta, a software engineer at Clarium Capital, who yesterday quoted admiringly from the debt-crisis book, Endgame:

We will need 15 to 18 million new jobs in the next five years, just to get back to where we were only a few years ago. Without the creation of whole new industries, that is not going to happen. Nearly 20 percent of Americans are not paying anything close to the amount of taxes they paid a few years ago, and at least 10 million are now collecting some kind of unemployment benefits or welfare. The jobs we need will not come from government transfer payments. As we saw earlier, they can only come from private businesses. And in reality, as we discussed in previous chapters, it is business start-ups that are needed, as that is where the real growth in net new jobs are. And that means investment. But if we allocate our investment money to government bonds, if we tax the capital needed by entrepreneurs who invest in and start businesses, we delay that return to growth.

Their message is clear: the government has diverted capital from private enterprise. Taxes are too high. The government is too large.

Maybe they are right. Maybe these are America’s big problems. But these certainly aren’t the problems faced by Silicon Valley today.

For starters, the problem in Silicon Valley isn’t a lack of capital. With Russian investors promising to fund an entire class of startups sight unseen and Sequoia Capital telling its whole portfolio to raise money now, there is, by common consensus, more capital than we need. Sometimes it is hard to look into the seeds of time and say which grain will grow and which will not, but many, many grains are getting plenty of water and sun. And since interest rates on government debt are at historic lows,  the government is hardly competing for resources with entrepreneurs.

The problem isn’t muffled incentives either. You can’t throw a rock in Silicon Valley without hitting a would-be entrepreneur crazed to make her first million. Tax breaks already ensure that venture capitalists and entrepreneurs alike pay taxes on million-dollar paydays at a lower rate than the average middle-class family. If taxes were higher, the 24 year-olds starting companies today wouldn’t even realize it, much less be deterred.

The problem isn’t cumbersome regulations, which hardly affect companies with less than 100 employees. Most startups are a regulatory free-fire zone, in which engineers and sales-people are not entitled to overtime pay or other workforce protections. Entrepreneurs can hire or fire whomever we want with impunity, even when we are like Kurtz in the lawless world of “Apocalypse Now,” completely isolated and deranged.

The problem — the only problem, so overwhelming that it is shocking to me that entrepreneurs complain about any other — is human capital. There simply aren’t enough software engineers, mathematicians, writers, designers for most technology companies to fulfill their potential. With U.S. unemployment above 9%, Redfin has still had some positions open for more than a year. We have a dozen projects that could become multi-million dollar businesses, but no one to lead them.

The short-term solution is to import talent, ensuring that the U.S. is the obvious destination for the world’s smartest, most ambitious people. No one in Ghana or Brazil believes that she can pick up and start a business in China. But that is still the American promise, that you can come to America and become a king of our economy in a single generation.

We also need to retain talent in the sciences, by funding basic research. There are many people in labs creating the next Internet or a new cure for cancer, who have no clue how to commercialize their research or write a business plan that could attract funding; too many abandon research because government grant money has become so hard to come by.

But the long-term solution is that the U.S. must lead the world in education, in math, science and writing — not in business, marketing, or sales. We have to get better at designing and making stuff, and the stuff we have to make isn’t steel or toys or timber, the kinds of things that a post-war generation with a high-school education could easily manufacture.

The stuff we have to make now is the hard stuff, the stuff you need a degree in physics or computer science to make: solar panels, social networks, mobile-phone applications. The reason there is a widening gap between rich and poor in America, why there’s a Silicon Valley boom and a main-street bust, isn’t mainly because of  plutocratic government policies, but because there’s an education gap. Technology creates more and more leverage for educated people, who make more and more money.

So as a society, we need to invest more than we did 50 years ago in our human capital. This is not spending, which is just money you’ll never get back. This is an investment, in which we can all expect a return. There are conservative and liberal approaches to this investment. The conservatives believe we need to bust up the teachers’ unions so we can get more value for our money, and allow for more innovation with magnet schools and vouchers. The liberals believe that simply paying enough to attract and retain talented teachers is the answer. They’re both right.

The truth is the government’s relationship to Silicon Valley is like the parent of a gifted college student, hovering around, asking how to help and mostly being told “just leave me alone.” The parent can’t do much at this point in the student’s life, except to be the one blamed for everything wrong in the world.

But what the parent did many years ago really matters, and this is also true of the government. Redfin hires plenty of people who went to Andover for high school and Harvard for college; not enough of these people exist. Most of us went to public schools all the way through, and the ones who did often work the hardest and make the most of our opportunities. If the government hadn’t educated those people, we’d be up the creek.

We should stop talking about Obama’s or Bush’s or Clinton’s jobs-creation policy. The government can’t create jobs quickly. It can print money or not print money. It can police corruption and fraud. Its main functions, taxing and spending, have marginal effects on current economic activity. The rest of what the government does is all long term.

Current economic activity comes from people who know how to make the stuff that other people want, which has such immediate and obvious rewards that it requires no incentives whatsoever. We just need to make a collective, long-term commitment to create more people who can make stuff. That’s Silicon Valley’s problem, and that’s our only problem. We can take political positions on other people’s problems but they’re just that.

The Wall Street Journal Obviously Isn’t a British Tabloid. So Why Do So Many People Want to Believe That It Is?

Until last night, I’d never agreed with the Wall Street Journal editorial page, which is far to the right of any moderate conservative or liberal stance. But I couldn’t agree more with its spirited defense of itself in the wake of the British hacking scandal.

Already, Reuters’s Felix Salmon has posted a survey asking if the Journal’s editorial board actually believes what it’s saying. The New York Times’s David Carr describes the Journal’s pride in its work as the ultimate sign of its corruption. Joe Nocera expects the Journal’s best writers to distance themselves from their own paper.

But why should the Wall Street Journal embrace the idea that Britain’s blood-crazed tabloids have stained its own reputation? No one seriously thinks the Journal would bribe sources or hack cell-phones.

This isn’t even about the original crimes, which the editorial duly denounces. We all agree: the Rupert Murdoch-owned tabloid that stole a murdered girl’s voice-mail deserved to fold. The people who authorized these tactics should go to prison. The broader scandal lies in vendettas against politicians and their craven efforts at appeasement.

And this shouldn’t be about Rupert Murdoch’s politics. What’s at issue is a topic we have discussed many times before here, which is the future of journalism. The only thing Rupert Murdoch and I have in common is that we both care very much about the future of journalism.

So it was invigorating for me to see, at a very dark hour for the profession, that the Wall Street Journal didn’t excoriate itself in a Stalinist show trial of self-hate, but stood up for the many, many ways in which it is different from The News of the World, stood behind the changes it had made to turn a profit, and remained true to a fired colleague whom it would have been far more convenient to ditch.

This defense of the business of journalism didn’t sit well with all the journalists waiting to attend the next newspaper funeral. And it didn’t sit well with many of my peers in technology, who fulminate against Murdoch’s assault on the Wall Street Journal while building businesses that are threatening to put all newspapers, including the Journal, into the ground.

We can’t get nostalgic about the gold old days of a purer, better journalism, and not just because our memories tend to be rose-colored. We have to make it work. My own take is that Rupert Murdoch is the only businessperson the world has seen outside of Michael Bloomberg with the moxie to do that — not to fulfill a noble civic duty like the New York Times’s Sulzbergers or to aggregate “content” on whatever searches are trending on Google — but to make money from breaking original news.

What gives Murdoch a shot at success in this endeavor is what got him into trouble in Great Britain: his old-fashioned lust for scoops. I don’t like Murdoch’s insistence on shorter stories or his preference for more stories about politics and less about business. But at least therein lies a point of view on how traditional newspapers can remain relevant; at least Murdoch is trying to win.

Who else is left in the media business to care about newspapers? That’s the main reason why Murdoch over-paid for the Wall Street Journal. He stuck to his guns on digital subscriptions, and has resisted Google’s self-serving insistence that all content should be free. He’s under fire now in part because he stood by his editors for too long.

Disagree with Murdoch’s politics all you like. But then compare his commitment to newspapers to that of Sam Zell, the real estate magnate who loaded up the Los Angeles Times and the Chicago Tribune with debt, then ran them into the ground. I doubt very much that Zell ever hoped, as Murdoch has, that his children would run a big paper, because the only thing Zell every wanted to do to a big paper was squeeze out its last remaining pennies.

I don’t like giving Murdoch any credit, and not just because of our ideological differences. His ethics are troubling because he doesn’t seem to recognize the boundary between his business interests and the news, and because he is a sensationalist.

And he is overt about his mission to politicize news because he’s convinced that everyone else is doing the same thing; his rationalizations for doing this are no different than that of your run-of-the-mill adulterer or embezzler, except that Murdoch and all the other partisans are cheating the entire apparatus of democracy.

And now his ethical lapses have combined with the aggressive culture he created to result in a new, terrible low: the hacking of a murdered girl’s voice-mail. Let’s just remember that the solution to this problem is the insistence on ethics, not the absence of aggression. If there’s one thing newspapers can’t afford to lose today, it’s what’s left of their aggression. Bravo to the Wall Street Journal for being one of the only ones on the left or the right to know the difference.

The Web Is Becoming One Big K-Mart

When I first started out in Silicon Valley, the Internet was like that clothing label for African Americans, FUBU: for us and by us. Most websites were an echo chamber for highly educated people to hob-nob with one another. Most entrepreneurs took Mike Moritz’s advice to build products for themselves, only discovering other users later by happenstance.

It’s still mostly that way. The kinds of services my friends love to use, like Foursquare and Instagram, don’t appeal to my mother. Many, like Digg, probably never will.

But in today’s era of high-revenue startups, hardly anyone has noticed the emergence of a new breed of companies. The ones that hit $100 million the fastest have cashed in on lower- and middle-class, value-conscious consumers — the kind of people whom their Stanford-educated founders hardly ever now meet.

No one was surprised when the founder of Groupon admitted he doesn’t use Groupon much himself: why would a billionaire snap up a deal for $5 off his next pastry purchase? Building a product first for yourself and yourself alone is what artists do; as a business-man, Tony Hsieh is proud that he built Zappos into an e-commerce colossus without ever really liking shoes.

The first business to reach $100 million of revenues in less than four years, eBay, appealed directly to middle America’s bargain-shoppers with a wide range of odd goods, tantalizing prices and marketing come-ons; its management team probably hadn’t been to a real-world garage sale in years. Back then, eBay was the exception. Now, a generation later, a bunch of companies have reached that milestone more quickly, including Gilt, Groupon, LivingSocial and Zynga, and they are the rule. All take the same approach:

1. Profit-driven management teams
2. Focused on hyper-growth rather than sustainability
3. Targeting a mass-market audience from the get-go rather than early-adopter niches
4. Marketing aggressively, even in ways that occasionally get it into trouble
5. Teasing high-frequency, low-cost, impulse purchases

It’s a different world, but instead of one far-flung corner of the Internet galaxy, it now sits at the glowing center, white hot with profits. We’ve hardly noticed the change. If you want proof of how far apart the money-makers and the taste-makers have been, look no further than the Internet’s ultimate taste-maker, Michael Arrington. Mike waited to try Zynga for the first time more than two years after the launch of Zynga’s first game.

By that time, Zynga had already cleared $100 million in annual revenue. When the digerati did finally take notice of these companies, it was mostly to complain about online scams and bankrupt coffee-shops. The Internet’s idealists, the people originally excited by the communities created on Flickr and Digg, still haven’t made their peace with the Internet’s wheeler-dealers.

But the boom this time belongs to Groupon and Zynga as much as anyone else, and that boom is cashing in on America’s bust. The premise of all these services has been to let people play games, go to zoos or buy clothes for much less than they’d normally pay. As the country has gotten poorer during the recession, Silicon Valley has gotten richer by turning much of the Internet into a gigantic K-Mart.

In the same way that communities ask themselves whether casinos and Wal-Marts create more poverty than wealth, America may begin to wonder what this part of the Valley, the one far from Google and Facebook, does for the rest of the country. The fact that the tech economy and the real economy are moving in opposite directions, as TechCrunch observed today, is not just an uncomfortable paradox. It’s cause and effect. The best time to start a deal-driven website is when people really need deals.

And nothing creates a frenzy like a bargain. A bartender in Seattle’s trendy district of Capitol Hill recently complained to a friend of mine that he can always tell when Groupon offers a promotion because the “bridge-and-tunnel” customers flood the place. If it’s a LivingSocial deal, the bartender sniffs, “it’s even worse.”

The problem is that frenzies don’t last. Buying stolen stuff at eBay didn’t always make people feel good, which is why some people a few years ago stopped doing it, and why eBay got serious about cleaning itself up. Now Zynga, Gilt and Groupon face the same challenge.

As we wrote last week, there are plenty of Internet companies now going public that make the world better. But as we realized at Redfin a long, long time ago, if the only thing the Internet offers is the same old thing, but cheaper, a few companies will get rich — quickly but perhaps not for long — and the world will be poorer for it.

For the Most Affordable Homes, Many in the Middle-Class Need Not Apply

It is strange but true that the most universally agreed-upon tragedy in American real estate is falling prices, otherwise known as more affordable prices. But the actual tragedy is that the people who need affordable homes the most today can’t buy them: banks today often won’t lend money to reach-up buyers and, when selling foreclosed homes, banks won’t take their money either.

The problem is that the programs designed to ease credit for the middle class, Federal Housing Administration (FHA) and Veterans’ Administration (VA) loans, impose rules that have completely diverged from the new realities of a distressed market. Banks liquidating as-is properties at fire-sale prices will almost never agree to the repairs needed to make a home move-in ready, as required by FHA and VA loans. And banks aren’t waiting for additional inspections, appraisals or paperwork required by FHA and VA loans.

The result: anyone who hasn’t amassed a small fortune, including many vets, first-time home-buyers and small-business owners, are effectively disqualified from buying the most distressed properties, which usually sell at a 30% discount to neighboring listings. What these buyers are missing out on isn’t just a tiny slice of the market. In cities like Phoenix, Miami and Las Vegas, distressed properties are the market, with more than half the home sales being sold or approved by banks, not occupants.

So even as we preside over one of the rare moments in American history when property forcibly changes hands – on a scale akin to the Oklahoma land rush if not the Russian Revolution – new lending rules ensure that this transfer not only impoverishes the middle-class people forced out at the market’s nadir, but enriches the wealthy who buy the abandoned home with cash. Nearly a third of all home sales are now all-cash deals, many bought by hedge funds.

The banks selling houses have not been subtle about their preference for investors. In the listing remarks that often only agents can see, the bank owning the property outlines the financing options it will accept for a home, excluding veterans and first-time home-buyers using Veteran Affairs (VA) and Federal Housing Authority (FHA) loans.

We know from first-hand experience that banks tell the real estate agents hired to sell these homes to reject any offer based on a VA or FHA loan. Even when there’s a bidding war, the banks selling foreclosed properties want a sure, easy sale more than an extra $20,000, particularly when appraisals for new loans have become, for many listing agents, a game of Russian roulette. What matters in today’s market is how much money you have, not how much you’re willing to pay.

One of Redfin’s Denver clients, Joel Brown, a master sergeant who served during the Iraq War, got this news in writing, and recently appeared on the Denver news to talk about it. Joel’s agent has asked time and again: “why would the banks spurn a vet making an offer, especially if he wants to pay more?”

The answer isn’t surprising, or even particularly diabolical. You can’t blame banks digging through a backlog of more than one million foreclosed homes for trying to sell properties as-is, FHA and VA rules notwithstanding. Getting a VA or FHA loan approved is also more hassle for the bank’s real estate agent, and the delays associated with government-backed loans often put off everyone who’s anxious for a quick sale.

Joel just came to terms on the sale of a conventional listing, so it’s not as if he’ll be homeless as a result. It’s just a surprise to find a buyer shut out of the best deals for using a government-backed loan. What’s galling is that investors getting those deals often turn around and sell the place at a mark-up to the buyers who just lost out due to their financing.

As a result, the people who should benefit most from more affordable housing often describe the house-hunting experience as frustrating and demoralizing. Many real estate agents dread representing buyers with FHA and VA loans. Often the buyers themselves just give up. This isn’t an abstract or occasional possibility for Redfin; it has been the experience of probably more than a thousand of our customers.  A market that should be a home-buyer’s paradise is quite the opposite.

This paradox is deepening the real estate crisis. You rarely see individual sellers refuse to consider FHA or VA buyers; these sellers can’t afford to turn away anyone who might pay a higher price. But even as foreclosures gut neighborhood homes prices, this is what banks are doing.

Fortunately, there’s a simple solution to the problem: just as it’s a Fair-Housing-Act violation to reject buyers for being African-American or Asian-American, it should be against the rules to reject buyers sight unseen for using a VA loan. For such a rule to be practical, VA and FHA standards requiring repairs to be made before a sale occurs should be relaxed and timelines shortened; lenders should be concerned only with whether the house is sufficient collateral for the loan, not with whether patio stairs need a new railing before closing. Programs for selling government-owned foreclosures to occupants rather than investors should also be expanded.

Such changes would not be unwarranted or irresponsible government meddling. We can extend credit to vets and first-timers without returning to liar loans and wink-wink appraisals, as the safeguards now required for conventional loans are mostly sufficient for VA and FHA loans, even with the lower down-payments.

It would be easier to argue for letting the market run its course if the U.S. hadn’t taken vigorous, unprecedented steps to drop interest rates to historic lows,  all while doing very little to allow the easy money to reach beyond Wall Street to Main Street. Already the world’s wealthiest people are richer than they were before the credit crunch. The new home-buyer, the bailed-out bank, the neighbor hoping for the return of higher prices, don’t have to be poorer in the exchange.

Why Renren and Yandex Sold Their Stock in the U.S.

Add one more commodity that China and Russia export for U.S. consumption: Internet stocks.

The emergence of Internet titans like Baidu, Renren and now Yandex is being hailed as a coming-out party for Chinese and Russian entrepreneurialism, but what’s striking about that party is its venue, U.S. stock exchanges.

Why would Renren, the so-called Facebook of China, sell its stock here and not where all of its users are? The answer: investors pay more for growth in the U.S. than elsewhere.

In China, valuations rarely stray far above ten times annual earnings. In the U.S., investors have valued Renren at nearly $5 billion, even though the company lost $64 million last year.

This tells the true story of why America is still the center of the Internet economy, and how tenuous our hold on that position is: even as our technical supremacy is challenged by engineers worldwide, our appetite for risk is much greater.

Culturally, America is still a destination for dreamers, con artists and get-rich-quick schemes. And that’s a big advantage. If we don’t reform education and immigration policy, or provide more funding for higher education, it may be our last one.

Microsoft & Skype Can Lose the Web But Win the Internet

What I’ve never understood about critics of Microsoft’s Internet strategy is what you expect Microsoft to do instead: just give up, and pretend the Internet doesn’t exist?

A more realistic strategy may be to give ground on the Web, but not the Internet. This after all, is what Apple has done, with iPhone and iTunes, with proprietary applications instead of HTML5. It has worked out just fine for Apple.

And this is what I like about Microsoft’s acquisition of Skype. Microsoft has demonstrated that it is fundamentally better at building software applications than websites. And Skype is an application, not a website.

Why not re-invent Office, Windows and X-Box to use the Internet for multi-media communications, with Skype as the backbone? The true threat to Microsoft’s business isn’t Google’s search engine, it’s Google Docs, which includes chat and video-calling functions that Skype can counter. Microsoft needs to give the world a reason not to buy the new Chrome notebooks that will start showing up in Best Buy next month.

Of course, the deal may well blow up. Any time you pay $8.5 billion for a company losing $7 million per year, it’s hard to call that financially savvy. And in general, it’s easy these days to be skeptical about any Microsoft acquisition, or any Microsoft Internet strategy, especially when acquiring a European a company that has been consumed and disgorged once already.

But I respect Microsoft for putting its chips in play. For years, the company’s corporate development strategy has been so quiescent that it seemed to be ceding the Internet to its competitors. No longer. It’s easy to criticize Steve Ballmer for doing nothing, or for doing anything; harder to say what you would do in his place. I’d try to win.

Fifty Agents Say So Long to Redfin

It isn’t easy building a network of high-quality real estate agents, even if you’re a real estate agent yourself.

Redfin just removed 50 partner agents from our tiny, exclusive partner program, most in the past few weeks. Forty two left because the customers we surveyed about their service so far had mixed reviews. Those are easy to take care of quickly, because we already have the customer’s email address for every referral, and we begin following up on each one within 24 hours of making the referral.

But we also survey an agent’s other customers, too. We start by pulling up the agent’s list of customers over the past 18 months from an agent-only database known as the Multiple Listing Service; we then ask the agent to provide an email address for every customer. Each customer gets a survey; if not enough customers respond, and respond with good reviews, the agent never joins our program.

But why can’t the applicant just fake the reviews, using fake email addresses? Well, the applicant can. But it turns out that potential fakes are pretty easy for us to detect, using software and customer follow-up too. When we spot a fake, we fire him, no questions asked, no second chances. Another eight agents just left our program for this reason.

We’re always surprised that anyone tries to get away with it. We interview every agent in our partner program, nearly all in person, accepting only 35% of all applicants. Even still, we later end up asking one in six partner agents to leave the program later.

Otherwise, we try very hard to be good partners. Since we’re agents ourselves, we know which customers are really ready to meet an agent, so a Redfin referral tends to be worthwhile. And since we don’t charge agents to appear on our site, instead splitting the proceeds from a successful transaction, most agents are eager to give Redfin a try. These agents often make a lot of money, building a reputation on Redfin that helps them get more and more business.

And we make money too. The partners only account for 5% of our business, but they help us cover far-flung areas, spikes in demand and obscure deal types that would be very expensive to support using our own employees, who keep pretty busy handling the other 95% of our revenues.

We hope that more agents who are ready to stand by their customer-service performance apply to our program, and that the rest just pony up for a pure no-questions-asked lead-generation site.

When Bad Companies Do Good Things

Entrepreneurs often ask me where good ideas come from. My answer usually is from bad companies.

The most obvious example of this is Facebook. MySpace prospered despite its founders’ penchant for pornography, spam and spyware. San Franciscans loved Friendster despite the reputed self-destructiveness of its founder, Jonathan Abrams. Was it really so hard to imagine that a Harvard computer scientist could build a better social network?

Citysearch was left for dead by IAC, but it was still folks’ only option for local online guides when Urbanspoon and Yelp came along. When Yahoo couldn’t do anything right, Yahoo Answers was a hit, which wasn’t lost on the founders of Quora. The same is true of newspapers and The Huffington Post, of Flickr and Instagram, of IAC’s Expedia and Kayak, of Match.com and OkCupid.

In all of these cases, the problem of social networking or photo-sharing seemed to have been addressed by a company that had lost its mojo. The reason that no one tried to build a social network after 2000 was because we all saw what happened to Friendster. The reason no one tried to build a technology-powered real estate brokerage is because we watched eRealty go down in flames.

These companies become the dead bodies in a passageway that new entrepreneurs have to step over before conquering the usual dragons a startup faces, of getting customers and making money. “Isn’t Yahoo doing that?” potential partners or investors ask. “Didn’t eRealty try that?” The answer to that question is “Yeah, but we’ll do it much better, cheaper, faster.” It can sound like empty swagger, and sometimes it is. But that’s how almost every startup succeeds.

What the entrepreneur has to focus on is whether people want a Q&A site, a local guide, a technology-powered real estate broker. Wherever there’s demand, especially demand so strong that consumers work with a company they don’t even like, you can find a way to win.

A professor of my brother’s once complained that freshmen who sprinted through One Hundred Years of Solitude as part of a 12-week survey course would go through life thinking they had read the book, never coming back to the experience when they could truly appreciate it.

The same is true of startups. The market concludes about an idea that we’ve been there and done that, but often it’s the second or third time that’s a charm.