Scott Cook is conducting an experiment. “It’s the corporate-counseling version of speed dating,” says the spectacled cofounder of Intuit, the finance software giant. He’s gathered his troops in a brightly lit conference room, where members of four Intuit departments are seated in front of 300 colleagues—plus 1,500 more watching via webcast—to hash out some business predicaments. Each team will take five minutes to present its problem. Then special guest Eric Ries will come up with a solution.

Arun Muthukumaran, a group manager of Intuit Payment Solutions, kicks off the proceedings. He describes a feature that could dramatically increase the number of small businesses that sign up for the company’s payment services. But implementation would burn up 20 employees’ time for a month. What if customers don’t bite?

Ries, dressed casually in a blazer, pastel shirt, and black denim, suggests a test: Rather than building the service and trying it out on customers, create a sign-up page that merely promises to deliver this groundbreaking capability. Then present it to some prospective clients. Compare their enrollment rate with that of a control group shown the usual sign-up page. The results will give the team the confidence either to proceed or toss the idea into the circular file. No one would actually get the new feature yet, of course, because it hasn’t been built.

“I guess we could piss off a few customers instead of thousands,” Muthukumaran says. Laughter ripples through the crowd.

Ries glances at his watch. “It’s 4:18 pm on Monday,” he says with a puckish grin. “On Wednesday at 4:18 pm, I expect an email telling me how it went.” The team members exchange glances that are equal parts bemusement and worry: They make software, not concepts. They build code through painstaking cycles of design, programming, and testing. Customers depend on their products and trust their brand. And this guy expects them to offer a feature that doesn’t even exist? Nevertheless, the rest of Intuit’s employees are exhilarated. The room breaks into fervent applause.

It’s something Ries is getting used to. At age 33, he is Silicon Valley’s latest guru. In the four years since he first posted his theories about running startups on an anonymous blog, his campaign to replace the typical product development approach—build it and they will come—with a system based on experimentation has become a juggernaut. Ries’ book The Lean Startup, published last summer, has sold 90,000 copies in the US. His blog, Startup Lessons Learned, has 75,000 subscribers, and his annual conference attracts 400 entrepreneurs, each paying more than $500. Harvard Business School has incorporated his ideas into its entrepreneurship curriculum, and an army of followers are propagating his principles through their own books, events, and apps. Whiz kids looking for investors pepper their PowerPoint decks with Lean Startup lingo, which has become so pervasive that TechCrunch announced a ban on Ries’ term pivot. Tech darlings like Dropbox, Groupon, and Zappos serve as Lean Startup poster children, and now the philosophy is reaching established companies, including GE and, this afternoon, Intuit.

Back in the presentation hall, Ries walks his audience through the tenets of his philosophy. The core motivation is simple, and a single slide sums it up: “Stop wasting people’s time.” Entrepreneurs and their managers, minions, advisers, and investors routinely pour their lives into products nobody wants. The business landscape is littered with the wreckage of nascent companies built at monumental effort and expense that imploded on contact with the market. (Paging Webvan! 3DO! Iridium!) Unlike an established company, a startup (or a new division within an established company) doesn’t know who its customers are or what products they need. Its prime directive is to discover a sustainable business model before running out of funding.

The key to this discovery, Ries proposes, is the scientific method: the business equivalent of clinical trials. Assumptions must be tested rigorously, Ries says—and here he rolls out one of those increasingly ubiquitous Lean Startup phrases—on a minimum viable product, or MVP. This is a simplified offering that reveals how real customers, not cloistered focus groups, respond. It may be a functional product or, like the Intuit team’s sign-up page, a come-on designed to elicit a reaction. Once tallied, customer responses produce actionable metrics, as opposed to popular vanity metrics, which create the illusion of success but yield little useful information about what customers want. By repeatedly cycling or iterating through a build-measure-learn loop—a method Ries calls validated learning—the Lean Startup develops a verified perspective that enables it to identify and fine-tune the mechanism that will keep the company growing, aka its engine of growth. Or, failing that, it can pivot to a new strategy. This, Ries insists, is the quickest, most efficient route to product/market fit (a phrase adopted from Silicon Valley kingpin Marc Andreessen), defined as the moment when a product achieves resonance with customers.

Never mind that this approach is a mashup of ideas culled from programming, marketing, manufacturing, and business strategy, leavened with hard-won insights that have circulated among Silicon Valley veterans for years. Ries makes no effort to hide his sources, and his presentation preempts his critics’ complaints. “Lean,” he explains, does not mean cheap; it means eliminating waste by testing ideas first. And it doesn’t mean small, but rather that companies shouldn’t ramp up personnel and facilities until they’ve validated their business model. His philosophy is not just for Internet and app companies—that’s just where it started. Reacting to customer behavior is not incompatible with creating breakthrough products like the iPhone, Ries says, which in the popular imagination sprang fully formed from the mind of Steve Jobs.

Right or wrong, the Lean Startup has a kind of inexorable logic, and Ries’ recommendations come as a bracing slap in the face to would-be tech moguls: Test your ideas before you bet the bank on them. Don’t listen to what focus groups say; watch what your customers do. Start with a modest offering and build on the aspects of it that prove valuable. Expect to get it wrong, and stay flexible (and solvent) enough to try again and again until you get it right.

It’s a message that rings true to grizzled startup vets who got burned in the Great Bubble and to young filmgoers who left The Social Network with visions of young Zuckerberg dancing in their heads. It resonates with Web entrepreneurs blessed with worldwide reach and open source code. It’s the perfect philosophy for an era of limited resources, when the noun optimism is necessarily preceded by the adjective cautious. In a highly connected, recession- ravaged economy, Eric Ries has created a story so persuasive that the Lean Startup may already be too big to fail.

It would make sense if Meagan Marks sat glued to some digital stock ticker, watching every twitch in Facebook shares on this first day of public trading in what is the largest technology IPO in history. Marks is a former Facebook employee, and a shareholder. And like every current shareholder, she has a huge incentive to see Facebook’s stock price march upward. But instead of gazing at dollars and decimals, Marks is watching the wind, hoping it picks up enough to go kite surfing with her friends.

There is a lot of misguided focus on which Facebook employees and investors are amassing what size pile of money, Marks says. “What this IPO is really about is the company now has more money to go out and make more acquisitions and build more interesting products.”

Marks, who joined Facebook in early 2006 and left almost four years later to become an angel investor and adviser to other startups, acknowledges the importance of this day for her and her Facebook peers financially. “But I keep forgetting it’s happening,” she says. “It’s surreal, an IPO was never what we were working toward. This IPO is not a lifetime moment for me — when we launched News Feed and the Facebook Platform, those were major lifetime moments.”

Talk to enough Facebook employees, current and former, and you’ll get a similar take on this moment in the company’s history. Yes, the financial windfall is spectacular, but don’t mistake this IPO for the endgame. If it were, the person who always stood the most to gain, Mark Zuckerberg, would have sold his company to Microsoft or any one of a number of other potential suitors long ago. There is a lot more Zuckerberg and his team want to accomplish. And if you are at all interested in Facebook the stock, that is very good news.

At a valuation of $100-plus billion, Facebook shares are already priced to perfection given what Facebook offers today and the 900 million users it has. If you agree that it is unlikely that Facebook can amass a significant number of new users in the near-term, then for the stock to appreciate Facebook needs to make more money from the users it does have. Pull that off, and Facebook shares go through the roof. Fail to do so, and Facebook shares could languish in some stock market purgatory.

Watch what the hedge fund managers do, says one Silicon Valley VC who already has shares in Facebook through a private transaction. “Most of the people I know in the hedge fund world aren’t touching it yet,” he says. “They wouldn’t short it (bet it goes down), but there are other companies out there with much bigger upsides. Look, I already own the shares, and I’m not buying more.”

What could change his investing stance is if Facebook were to start zeroing-in on ways to get money out of those who access Facebook on their smartphones. “The growth for Facebook is coming from international users, and most of those are mobile users,” he says. “Facebook has no idea how to monetize mobile yet, and it could be a very long time before they do. But if they do, that would be the breakthrough they need to raise their valuation significantly.”

Marks would agree, she just says it differently. “This success, this IPO, it’s a testament to not worrying about exit strategies,” she says. “It was never when, or how do we exit? It was always focusing on building great products.”

Right on cue, the wind picks up and Marks heads off to launch her kite. “You’ll have to let me know what happens in the markets,” she says, as she gathers up her board and heads toward the water. “I’m not going to be watching it.”

For the first few years after Mark Zuckerberg started Facebook in 2004, he’d end his Friday all-hands meetings by leading the company in a one-word chant. In unison the company would shout: Domination!

Some of the older Facebook employees — those over 30–thought the battle cry was sophomoric and undignified. It was. Most college kids are sophomoric and undignified. And had Zuckerberg not dropped out of Harvard to start Facebook, he’d have still been attending class there. But on the eve of Facebook becoming a public company, domination is appropriate. It’s really the only way to describe what Zuckerberg has accomplished in eight years.

Zuckerberg dominates Facebook as CEO and co-founder controlling more than 50 percent of the stock.

Facebook’s IPO will dominate the record books. Facebook is expected to raise more than $16 billion, making it the third largest IPO ever and valuing Facebook at more than $100 billion. That will make Facebook’s market cap bigger than Visa, PepsiCo, Merck, Unilever and Toyota, and it will likely make Zuckerberg the third richest person in the U.S. behind Bill Gates and Warren Buffett.

At its current trajectory, Facebook, the company, will dominate the Internet. Nearly a billion people now have Facebook accounts, or about half of all people online. Half of those — nearly twice the population of the United States — use Facebook daily. It has become what Yahoo, AOL and the other long-forgotten portals had hoped to become: the gateway to all our online activity.

Zuckerberg obviously needed a lot of luck to get Facebook where it is today. But when I met him for the first time in 2007, it was clear he’d already become a student of what made entrepreneurs like Bill Gates at Microsoft, and Larry Page and Sergey Brin at Google so successful. They all created businesses with powerful network effects — businesses, as Zuckerberg explained it to me, that at a certain point attracted new users simply so they could interact with existing users. “I think that network effects shouldn’t be underestimated with what we do as well,” he said.

Zuckerberg understood that people began using Microsoft Office because they didn’t want to risk being unable to open documents, spreadsheets, and presentations passed along by colleagues. There were other word processing or spreadsheet programs that were often better, but Office was good enough to keep people from taking a risk on them.

Zuckerberg also grasped how Google locked in its advertisers even as it was talking about users being one click away from using another search engine. In the interest of making sure the quality of its ads remains high, Google won’t show ads it thinks won’t generate traffic. A business that can’t get its ads to show up on Google might as well not exist. Google’s excellent search attracted hoards of users, which gave Google excellent data on what they were searching for, which enabled Google to show relevant, powerful and profitable advertising.

The network-effects machine that Zuckerberg has devised (and that you and your friends power) is why Facebook is so dominant, and why Google, in particular, is so scared of it. Facebook is rethinking what it means to find things online. Search to Google has meant algorithms working on anonymous queries. Search to Zuckerberg includes that, but it also means people using their real identities helping their friends find things.

It’s not just the idea that Facebook might have built a better search engine that worries Google. Very little of the information shared on Facebook is visible to Google’s crawlers. The gang at Google worries that some day, if too many people use Facebook and not enough use Google to find what they are looking for online, the quality of Google searches will decline along with the profitability of its advertising. It’s why Google has launched Google+ and why CEO Larry Page is making year-end bonuses contingent on its success.

The only thing for Zuckerberg to do now is to make sure not to mess it up. Obvious as that sounds, Zuckerberg’s penchant for mess-ups have been as prominent as his brilliance and vision. He believes that it is Facebook’s mission to make the world more open and connected. But he also believes that he has to do that by pushing his users places they might not go by themselves.

He’s been right about this often enough — as when he stuck to his guns about keeping the newsfeed in the face of protests in 2006 — that it has made him blind to other privacy land mines. “Do you own Facebook? or Does Facebook Own You?” New York magazine intoned a few years back. That is the vital question that Zuckerberg and Facebook users are starting to unpack. Getting to an answer gracefully, or not, may well determine whether domination for Facebook is a long-term condition, or, as with so many technology companies that have risen up and fallen, fleeting. Expert that he is, Zuckerberg undoubtedly knows the MySpace rule of network effects: They work in reverse too.

In the finance industry, where the footnotes are almost always more important than the body of the text, the most under-footnoted sentence ever is this one: “People should invest in what they know.” It is a crowd-pleasing and straightforward bit of prose, so what’s the problem? Plenty, and let’s use this week’s epochal Facebook initial public offering to explain why.

Conservatively, there are four footnotes missing in this tidy, seven-word sentence:

People¹ should² invest³in what they know.⁴

1. PEOPLE
First, people doesn’t mean you. Granted, it sounds like it means you, or at least me. It really means people who have come to the conclusion, after careful thought and consideration, that they have money they don’t mind losing; that the people they know and love don’t mind them losing; and, most importantly, that a Reasonable Person (perhaps my favorite self-refuting term of financial prudency art) would agree they can afford to lose.

2. SHOULD
Should doesn’t mean must, nor does it mean it would be really cool if. Yes, it feels like you need to get involved in the Facebook IPO, but you don’t. That is how Wall Street works though, especially when it comes to hot stock offerings. Wall Street is a compulsion-creation machine: It fills you with the slack-jawed, guh-guh-guh desire to … buy or sell something or another, before you must buy or sell something else. And hot IPOs are like a gateway drug to a lifetime of day trading. It’s about as hard to be a bystander on a buzzy stock offering as it is to say no to kids when the ice cream truck rolls around. Must. Buy. The. Facebook. IPO. Two scoops for everyone!

3. INVEST
Investing is not the simple act of purchasing a stock, any more than buying a plane makes you a pilot. Investing, instead, is the business of figuring out whether it makes sense to part with your money–given what you’re getting for it. Facebook is a lovely company, one that has grown to have, yes, a billion monthly active users, and you are probably among them. It is run by Mark Zuckerberg, who is, I’m given to understand, 28 years old and in possession of various lawfully obtained hoodies. It certainly would be nice to have Facebook shares, but they’re nutty expensive (26 times sales). And unlike other expensive things the average person buys (food and real estate are two biggies), you can’t eat Facebook shares or sleep in them. There are, in other words, various Maslow-related items to settle before you get your inner Buffet on relative to the Facebook IPO.

4. IN WHAT THEY KNOW
Let’s put blame where blame belongs. Peter Lynch popularized the buy what you know idea. The former Fidelity fund manager wrote decades ago how the average investor can get “one up on Wall Street” by buying what he or she knows. He told a lovely story about his wife’s fondness for Hanes pantyhose, which in turn led him to buy the company’s stock, thus turning him into the billionaire you should have been. Granted, I’m skipping steps, but so was he–and who wouldn’t? You’ve got this seductive, crowd-pleasing idea that, rather than visiting companies, immersing oneself in spreadsheets, or, in the current vernacular, creating and selling synthetic credit instruments to under-informed European counterparties, one can make oodles of money by simply following one’s own interests–like your love of Facebook status updates.

Being aware of something and knowing about it are not the same thing. Confusing the two is like dating someone based solely on their having a mailing address. You have one? Me too! Swoon. Unless you’re planning to be implausibly lucky, you must know something. It must, for example, be the right investment, at the right price, and at the right time. You (meaning me) could have bought Microsoft a decade ago and it would still be worth less than what you bought it for. Microsoft has made kajillions in profits in the interim, but also casually broken the spirits of a generation of investors. You have to have an edge, and seeing Facebook (or Microsoft) daily on your desktop isn’t one.

You can see how the combination of buy what you know and the Facebook IPO turns quickly to heartbreak. Most investors know nothing about the latest tech stock–solid-state drives? Cloud what? But they do think they know, really know, Facebook. They use it, often multiple times a day, and so do their friends. And more of their friends are joining in the fun every day! And they’ve heard, perhaps even on Facebook, that Facebook is going public. This isn’t Hanes and hosiery, it’s better: They know Facebook soooo well.

I can’t imagine how it could possibly go wrong for the average investor. Which is to say, I can imagine it entirely.

Paul Kedrosky is an investor and Senior Fellow at the Kauffman Foundation. He bid pi, $3.14, for Facebook shares on E*TRADE. No takers yet.

Google has grown a brain, and users in the U.S. will soon begin to see new search results starting Wednesday, where Google will display a widget of information about a topic or thing, instead of just a list of links.

It’s called the Google Knowledge Graph, which the company says includes some 500 million persons, places and things — and their billions of relationships to one another.

Google calls it a new underpinning for its still-dominant search engine — a change the company says will affect more searches, percentage-wise, than when it introduced “Universal Search” in 2007, which brought together video, shopping and image results into the list of links to webpages.

So for instance, in response to a search for the astronaut Ellen Ochoa, Google will now include a box of information about her that includes the kind of information searchers generally want about astronauts – such as what missions she flew and how much time she’s spent in space. For an architect like Frank Lloyd Wright, you’ll see a box with biographical data as well links to other knowledge base entries of their most famous projects and to other famous and related architects.

The modules will show up in the right-hand side of the screen, where ads are typically shown now.

Google fellow Ben Gomes says the company has been working on the project seriously for about two years, about the time it bought the semantic search startup MetaWeb.

“We knew we needed to make a real-world map of things,” Gomes said.

By connecting a search query to a real representation of a thing, Google says it now knows what users are searching for and is able to move past simply matching search terms to words in webpages.

More importantly, Gomes said, the structured knowledge base will allow Google to eventually be able to actually answer questions like, “Which governors of Western states have become president in the last 50 years?” That’s a tremendous change for a traditional search engine, which works by indexing the web and trying to figure out what algorithms will yield the best set of webpages by indexing words in the page, metadata and the links between pages.

Google built the knowledge base pulling from disparate sources, both internal and external. Databases used include Wikipedia, Freebase, the CIA’s World Facts book, as well as its own databases of places, products and books.

That’s not as simple as one might think.

“These databases are messy, redundant and sometimes conflicting,” Gomes said. “We have to reconcile them all into one coherent knowledge graph. It’s the kind of task we really like at Google.”

Gomes acknowledges that the system draws heavily on Wikipedia, which often ranks highest in queries where people are trying to learn about a topic and which the knowledge base results rely heavily on.

“We are building on the shoulders of giants in terms of Wikipedia,” Gomes said, adding that users can report bad information to Google which it will share with Wikipedia.

Google’s not the first to try to know about the thing that you are searching. In 2009, Microsoft’s Bing introduced a set of specialized boxes for universities and cities that contained information that searchers might want to know, but those appear to have been removed.

And Wolfram Alpha has been hard at work structuring messy data sets so it can compute the answer to wide arrays of questions including knowing commercial flight data to answer a question like “What plane just flew overhead in Alpharetta, Georgia?”

The new search results will be rolled out to users in the United States starting Wednesday morning. Google did not say when, or if, the feature will be used on international sites.

Sometime in early 2004, as Mark Zuckerberg was furiously coding the first iterations of The Facebook in his Harvard dorm room, the Internet passed what then seemed to be an impressive milestone: 750 million people worldwide had become connected. The exact birthdate of the Internet is difficult to pin down, but it’s fair to say that it took at least three decades for the net to reach a population of that size.

Today, after just eight years in existence, Facebook now has more than 750 million users all by itself. At that astonishing rate of growth, the company is on track to accomplish much more than just a multibillion-dollar IPO. Facebook is on the cusp of becoming a medium unto itself—more akin to television as a whole than a single network, and more like the entire web than just one online destination. The evidence for that transformation goes well beyond the sheer number of users. Many businesses now bypass the traditional web altogether, limiting their online presence to Facebook. Already the platform has spawned one billion-dollar company (the social gaming giant Zynga) and swallowed another (the photo network Instagram). The average time people spend on the site has increased from four and a half hours per month in 2009 to nearly seven hours—more than twice that of any major web competitor.

Facebook’s growing dominance suggests that the platform may very well represent the third major evolution of the network age. First the Internet popularized the crucial organizing principles of peer-to-peer architecture and packet-switched data. Then the web ushered in a new set of governing metaphors that were fundamentally literary in nature: a network of “pages” and footnote-like links. Powerful as they were, though, both those platforms were organized around data, not people. From a computer scientist’s perspective, this might not have seemed like a shortcoming. But most human beings don’t naturally organize the world through metaphors of domains or hypertext; instead they mentally map the world according to their social networks of friends, family, and colleagues.

So it should come as no surprise that we now find ourselves gravitating toward a new platform grounded in those social maps. And the bigger we make the platform, the stronger its gravitational pull. The Internet—meaning everything from email to file trading to voice-over-IP phone calls—was always technically larger than the web, but the web’s mass adoption managed somehow to overwhelm the vessel that contained it. The web became the main attraction; the packets and DNS lookups became the plumbing, essential but invisible. Facebook now threatens to perform that same jujitsu against the web itself. The difference, of course, is that no one owns the web—or in some strange way we all own it. But with Facebook we are ultimately just tenant farmers on the land; we make it more productive with our labor, but the ground belongs to someone else.

The sheer magnitude of Facebook’s success is one reason why, as the company charges toward what will likely be the most successful public offering in the history of capitalism, its critics are growing in number. Troublesome corporate behavior is easier to swallow when there are other choices out there, when you have the option to take your business to another store down the street. But when one company owns the whole street, each little transgression is amplified. A few years ago, the primary critique of Facebook revolved around its prodigious capacity for wasting our time. Today the complaints run much deeper: Facebook, we’re told, is a threat to core social values, to privacy, to the web itself.

The most vociferous of Facebook’s detractors contend that it has a long track record of aggressive, if not downright abusive, privacy policies. An early attempt at personalized advertising, Beacon, was famously aborted after users filed a class-action suit claiming that their personal activities online (including purchases made from various ecommerce sites) had been revealed to advertisers and friends without their knowledge. The company’s new Open Graph protocol gives developers the ability to share user behavior in one Facebook app—third-party programs that, like Zynga, run inside Facebook—with other apps that might want the data. For example, if you announce in a recipe app that you’ve cooked a particular dish for dinner, that news can be broadcast to your feed or put to use by a dieting app that tracks how many calories you’ve consumed.

No doubt Open Graph will lead to some wonderfully inventive and useful new tools, not to mention a vast universe of mindless social entertainment. The problem is that most of us don’t have time to monitor all the various ways our actions are going to be shared and tracked across the network. Launch an Open Graph app using your Facebook ID and you’ll get a warning that says something along these lines: “This application may: post status messages, notes, photos, and videos on my behalf; access my data at any time; access my data when I’m not using the application.” Technically, this language is simply describing the consequences of a “seamless sharing” world (in Facebook’s preferred phrase). But as a practical matter, do users know what they’re signing up for?

To Facebook’s credit, the company has given people very granular control over their privacy—the privacy settings page includes dozens of separate options that can be toggled on or off. And it has a long track record of success in putting users at ease, eventually, with new features; initial criticism usually softens into acceptance and, soon, enthusiasm. It’s easy to forget that even the News Feed feature, which now seems unobjectionable (and indispensable), sparked a backlash when it was launched. When the company makes mistakes, it seems to learn from them: Beacon was pulled, and recent updates have greatly simplified the privacy-settings page so users don’t get overwhelmed with the initial dashboard of options.

Kevin Hartz is sitting this one out.

Sure, Hartz is busy with his day-job as CEO of online ticketing startup Eventbrite, but it’s not a time management thing that keeps him from his usual angel-investing habit. It’s more a money management thing. Hartz doesn’t like to invest his when there is so much sloshing around Silicon Valley.

The last new investment Hartz made was more than a year ago. At the time it was a little company no one had heard of called Pinterest. You’ve probably heard of it now. Hartz also made early bets on Airbnb, Flixster, Palantir, Trulia and Yammer among others. He’s mobbed up with the PayPal mafia, not as a former colleague, but again, because he was an early backer. Hartz is making follow-on investments in his current roster of startups, but he’s not looking to do anything new — it’s just too expensive.

“We don’t know where we are in this cycle,” Hartz says from Eventbrite’s San Francisco headquarters. “We can’t know how much longer this abundance of capital will last, but I don’t want to be a part of it. When I see a massive number of new investors and carpetbaggers coming in, it’s time to get out.”

Hartz doesn’t use the word bubble; it’s more complicated than that for him as a guy who sits on both sides of the money equation as an investor and an entrepreneur. It’s more a winter is coming view of the startup world, especially for the consumer internet on which Hartz focuses. His advice: Get prepared for a chill to set in.

As an investor Hartz points to the usual signs of too much money-chasing deals. The billboards on highway 101 between San Francisco and Silicon Valley touting startups no one has heard of. The bus stop signs in tech-heavy locales like Mountain View and Palo Alto advertising scads of engineering jobs.

“Everyone is competing for the same people, going after the same real estate, the same support services,” Hartz says. “The natural resources of the startup world are getting scarcer and scarcer, and the cost is getting higher and higher. It’s all an outgrowth of an abundance of capital.”

While venture capital investment in internet companies at $1.4 billion was down slightly in dollar terms in Q1 of 2012 compared to the end of 2011, there has been eight consecutive quarters of more than $1 billion invested in the sector according to the National Venture Capital Association. That’s well over $8 billion in a two-year period. No wonder for every Instagram, or Dropbox, a dozen copycats crop up.

All that money makes novice entrepreneurs do funny things, Hartz says. “That relentless competition coupled with the cash tends to train entrepreneurs to be far more aggressive and less focused on things like measurable results,” Hartz says. “There are some entrepreneurs who can and should be aggressive, but they possess a certain type of pattern recognition, an understanding about what’s really lifting a business.”

Hartz puts his fellow PayPal mafia brethren in that category, Tesla and SpaceX CEO Elon Musk in particular. “The PayPal guys have always been very good at seeing what makes a business work, and then raising capital opportunistically during the good times,” Hartz says. “They bulk up ahead of the downturn.”

At Eventbrite Hartz is taking his own advice. He’s raised $80 million to date, but is sitting on $58 million preferring to run Eventbrite frugally while growing steadily month after month. Don’t misunderstand, Hartz believes in the consumer internet. He’s all-in as an entrepreneur, but as an investor, he’s out.

“When things are most dire, and people are most scared,” Hartz says. “When people openly mock the consumer internet space and the excesses of it, that’s when I will start investing again.”

How IGN Makes Small Changes for Mass(ive) Effect

What follows are seven tweaks gaming site IGN made to its homepage. Employing the A/B testing methodology, IGN is constantly modifying its site looking for those small changes in wording, placement, even color and form that will yield huge increases in click-through rates.

1. CHANGE: Moved “Videos” in the nav bar from in between “News” and “Guides & Cheats”, to in between “My IGN” and “Xbox 360”
RESULT: Moving the “videos” nav to the left resulted in an almost 93% drop in clicks on the “videos” nav link. Clicks to the rest of the nav items were either unchanged or improved slightly.
THOUGHTS: This was a huge surprise to the IGN team, and raised further questions about how IGN users behave. Are they simply accustomed to the “videos” link in its old location? Would the click-through-rate have improved given more time for the users to get accustomed to this change? Are most of the users clicking on the “videos” link return users, or new users?

2. CHANGE: “iPhone” in the nav was swapped out for “Mobile”
RESULT: A 5% drop in clicks.
THOUGHTS: IGN believed its population of committed iPhone-haters would be put off from clicking on “iPhone” in the nav. Turns out they weren’t.

3. CHANGE: “Mass Effect 3 Review” headline rewritten as “EXCLUSIVE: Mass Effect 3 Review”
RESULT: IGN found that almost any headline with “exclusive” in it had on average 5.2% fewerclicks.
THOUGHTS: IGN isn’t giving up on using “exclusive” for other types of content. The lesson is, it really needs to be exclusive.

4. CHANGE: The “Subscribe on YouTube” button in the right rail START unit was moved to the top right of the unit, next to the START logo.
RESULT: A 65,000% increase in clicks, but by the time the test finished, the improvement was almost 264,000%.
THOUGHTS: Don’t question why, just make the change. This was such an incredible increase in clicks the change was implemented permanently.

5. CHANGE: The thumbnail for the top blog roll story went from an abstract image to an image with a human figure in it. RESULT: The art with the human figure in it performed 11% better than the abstract image.
THOUGHTS: Perhaps the human eye is more attracted to images containing human figures.

6. CHANGE: “App Store Update: April 26,” the headline for the 2nd blog roll story was rewritten as, “Jetpack Joyride Tops Mobile App List.”
RESULT: The jetpack took off with a 50%-plus higher click-through rates.
THOUGHTS: Snappier copy does make a difference. IGN has seen headline changes boost click-through rates as much as 150%.

7. CHANGE: “Sign Up For Email Updates>>” became “Get Free Exclusive Content>>”
RESULT: More than a 34% increase in click-through-rate, with a 31% increase in subscriptions through those link clicks.
THOUGHTS: People love free and exclusive. Just as with the YouTube subscription button test, this change was so positive that it was implemented permanently.

Welcome, guinea pigs. Because if you’ve spent any time using the web today — and if you’re reading this, that’s a safe bet — you’ve most likely already been an unwitting subject in what’s called an A/B test. It’s the practice of performing real-time experiments on a site’s live traffic, showing different content and formatting to different users and observing which performs better.

Though it came into its own on the World Wide Web, the idea of A/B testing predates it, going back at least as far as catalog mailers and infomercials. In those metric-poor times, different phone numbers or discount codes could be shown onscreen or be printed on an insert as a way to track the allure of one pitch versus another. This data was a big step towards solving the age-old marketer’s bane (“half of my budget is wasted; I just don’t know which half”), but as a rule, any business insight ended at the point of sale.

If you were a blender company, you knew what made for sales conversions, but you couldn’t know how many people used the blender, at what time, how often, or whether it was for a milkshake or a margarita. On the web, and more recently in smartphone apps, companies are effectively able to monitor each press of the purée button. An app or site developer can know, for instance, exactly how many users are looking at a particular screen or clicking a certain button at a given moment—and often where in the world they’re doing so.

The rise of A/B testing online began around the turn of the millennium with internet titans like Google and Amazon, and in recent years it has been slowly seeping into ever-greater swaths of modern life, having become, now, more or less standard practice from the leanest startups to the biggest political campaigns. The touted “internet of things” concept may, in the next decade, catch the world of physical commerce up to speed with its software counterpart, finally making the purée button report back to corporate HQ.

More than this, though, A/B testing is not simply a best practice — it’s also a way of thinking, and for some, even a philosophy. Once initiated into the A/B ethos, it becomes a lens that starts to color just about everything — not just online — but in the offline world as well.

One Nation, Randomly Divisible for Statistical Significance

“It is one of the happy incidents of the federal system,” wrote Associate Supreme Court Justice Louis D. Brandeis in 1932, “that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”

In the realm of politics A/B testing makes an unexpected argument for things like block grants and state, as opposed to federal, power. As Silicon Valley’s A/B devotees can increasingly attest, not everything is best solved by discussion and debate. Differences in the way policy is implemented and issues are addressed at the state level make for a rough 50-way A/B test—yielding empirical data that can often go where partisan thought-experiments, and even debate at its most productive (but nonetheless theoretical) cannot.

Consider, for instance, the relationship between a society’s criminal justice system and its crime rates. A 2009 report from The Pew Center on the States shows that Idaho’s “correctional control” (jail, prison, probation and parole) population increased by 633% from 1982 to 2007, during which time neighbor Utah’s correctional control population increased by only 30%. In 2008, Alabama spent 2.5% of its state general fund on corrections; Michigan spent almost an order of magnitude more: 22.0%. What effect, if any, did such huge differences in policy have on the relative safety of those states? Such inter-state differences allow for a kind of side-by-side analysis that tracking federal data across different time periods doesn’t allow.

Of course, 2007 Idaho and 2007 Utah are different places, with other variables in play beside their correctional policies, and this blunts the impact of the data. A true political A/B test would look at completely co-extensive groups, truly randomly selected—say, by randomly divvying up Social Security Numbers into cohorts and providing different legal outcomes to each.

Here’s one way that could play out. Say (as has too often been the case) my car gets ticketed on street sweeping day: the ticketing officer runs my plates, which show whether I’m in the Restitutive Group or the Punitive Group. If the former, I’m fined the $10 it takes the city to hand-sweep that fifteen-foot section of curb. If the latter, I’m fined the $75 it will take to make me think twice every time I park. Lawmakers would determine the relevant metric (say, recidivism) and would quickly establish, to a scientific certainty, whether the stiffer penalty had the desired effects. Why debate when you can test?

Seemingly absurd notions like this, multiple codes of law operating simultaneously, start to make an uncanny amount of sense once one starts drinking Silicon Valley’s A/B Kool-Aid. Such a world—different permutations of the law in effect for different citizens in the same jurisdiction in the same time—starts to resemble strange speculative-fictional dystopian noirs like China Miéville’s The City & The City. It also starts to resemble the contemporary Web.

The Creative Process and the Slap of Data

A/B testing also casts an odd light on a practice close to home for me personally: writing. During my visit to the offices of all-things-gaming site IGN, I was allowed to try my hand at creating some alternative headline copy for the IGN homepage. I perused the day’s trending stories and found one whose headline seemed a little flat. I concocted an alternative that varied just by a word or two but was, I thought, snappier. Within seconds the test was live on IGN’s traffic, and within minutes the results were clear. My headline bombed.

I had officially been “slapped in the face by data,” as one developer put it: something of a rite of passage for A/B testers. The bigger slap, though, was the realization that my chosen profession was perhaps more quantitative and empirical than I’d imagined.

“It’s your favorite copyeditor,” says IGN co-founder Peer Schneider. “You can’t have an argument with an A/B testing tool like Optimizely, when it shows that more people are reading your content because of the change. There’s no arguing back. Whereas when your copyeditor says it, he’s wrong, right?” This comment stings retroactively, as forty-eight hours later I would cost his company umpteen clicks with my misguided “improvement.”

Conversations like this over the past months have prompted unexpected reflections on my own work. “So, like, how many A/B tests did you guys do when you were deciding the subtitle for your book?” a developer at one startup asked me. All of a sudden I felt the flush of shame. “Uh—none. We just all got together and discussed and picked one.”

“Huh,” said the developer, a look of curiosity and concern on his eyebrows.

Of course, what works for headlines and subtitles doesn’t work for novels, with their 90,000 moving parts. Indeed, developers seemed to treat me with sympathy and pity: As an author, I am expected to periodically disappear for 12 to 18 months and emerge with a massive and nearly finished product, virtually unseen before publication and unalterable afterwards. Its ultimate success or failure won’t be clearly measurable until years after its release, if even within my lifetime. For anyone in a data-driven culture, this is a nightmare scenario. And I confess there are days when I long for the tester’s certainty: the headline or ad-copy writer who takes three cracks at a sentence before 9:30 am, and by quarter of 10 knows once and for all which was best.

Ultimately, though, there are reasons to be grateful that life on the whole remains unamenable to the A/B test. The unholy thing about A/B testing is that it tends to treat users as fungible. Testing ad copy works because man-on-the-street X’s reaction is presumed to be a useful guide to man-on-the-street Y’s reaction. And when you do the test and the statistics are right, it is. But, in the political example, learning that a particular sentencing is excessive comes only after you’ve administered it to real people living real lives.

And as for finding the right words: Many of our most important letters, remarks, decisions, and questions are meant for an audience of one—a population size that admits no sampling. Where it counts the most—in family, in friendship, in love—we are operating by instinct, no A’s, no B’s, flying blind.

Fourteen years ago, as a lawyer for Netscape, Mitchell Baker created the open source license that made Netscape’s code free. It was a fateful event for both Baker and the web: Baker ended up leading a small skunkworks project called Mozilla that was eventually spun out into a standalone foundation devoted to making the web better generally, and to offering an alternative to Microsoft’s Internet Explorer specifically. With its Firefox browser, Mozilla is now bigger and more influential than ever, and Baker still serves as its chair.

Meanwhile, the open source, open-web spirit of Mozilla lives on in thousands of projects: GitHub, Android development, HTML5 apps and in Firefox itself. Now, with a healthy 25 percent browser share, Firefox is in a fast-paced browser race with Google’s own open source browser and Microsoft’s vastly improved IE9.

Not bad for a scrappy non-profit that had to fight for the hearts, minds and desktops of the world’s computer users, nearly all of whom were deeply controlled by Microsoft’s monopoly.

For her efforts fighting for user software that doesn’t suck, Baker is being inducted into the Internet Society’s Hall of Fame in its inaugural year.

In this interview with Wired, Baker looks back on Firefox’s success and what it meant — and explains why she thinks Mozilla’s new push to create a mobile operating system to rival Apple’s and Google’s matters just as much as Firefox did.

Wired: Firefox 1.0 came out in November 2004. The release had a lot to do with Microsoft’s Internet Explorer not getting any better and being full of popups and malware, but there was also something like a movement aspect to Firefox. What did it feel like? What was that sort of explosion all about?

Mitchell Baker: In in 2001 and 2002 there was no competition in the part of the software that actual human beings touch, i.e., the client; i.e., the browser. In those days the server-side capabilities of the web were growing dramatically and there was a lot of innovation and a lot of things happening. We were on our way to Web 2.0 in those days. We didn’t know it yet. We were just starting to talking about AJAX.

But all of that went through a single client, Internet Explorer, and there was no competition for that. It’s a completely rational economic decision when you own the market and you have 97 to 99 percent marketshare, and you also have 99 percent marketshare of the OS below it, [...] it is a rational economic decision not to compete with yourself and improve your product. Nevertheless, the result for the consumer was an abusive setting.

Consumers were interested in getting to the web and the only way to get there was through this tool, which was insecure — one of the most risky pieces of software you could put on your machine! A vector for all sorts of terrible stuff for which there was no competition. And for which there was no rational economic model for competition.

There was no interest in the venture capital world in funding another browser. Netscape had died trying to fight Microsoft. Who would ever try and compete in that space, especially after the browser had been done away with as a separate product and combined with the operating system? So in that setting, many of us were eager to interact with the web but the only available tool for doing so was low-quality, poor-performing, and a security risk.

Wired: So what was so different about Firefox?

Baker: This particular piece of software — the browser — is really important to the user experience, and it can be radically different.

It doesn’t need to be integrated into a vertical silo. You can actually have some control of it and there are range of possibilities in this browser space that seems silly only because nobody’s done them and nobody else in the system has an interest in doing them.

So that all sounds really abstract and idealist and blah blah blah. But when you actually take those ideas and you build them into Firefox, and you put Firefox in front of people, then they have a great product experience and the stuff we’ve been saying suddenly make sense.

And what we found right after we released Firefox was a wave of mail saying, ‘Well my computer runs so much better. Like everything is better.’ So what was happening was that the user experience of the web was deteriorating but people didn’t really understand that or understand why. It wasn’t until we were able to put the product in front of people, that what we were saying became clear.

Wired: Was that wave coming and you guys just happened to have the right surfboard?

Baker: Mozilla has one foot in the Valley, Silicon Valley product technology, and partly one foot in the social enterprise space. So in the Valley, of course, you need the right product at the right time. And some piece of it is really, really hard work and good vision, and some piece of it is being in the environment and seeing what happens and being nimble. And some piece of it is the right time. So we had all of these.

So that idea of a movement for a better web, that’s what Mozilla is. But that’s not exactly what Netscape founded it to be, but that’s what we made it into.

Wired: In 1998 when the decision was made at Netscape to open-source the Mozilla code base, you wrote the license and then later, Jim Barksdale suggested that you take over that part of Mozilla. At that point were these ideas fully fleshed out or was it a more nebulous and it wasn’t clear what was going to happen with the code base?

Baker: Those ideas were not nearly as well fleshed out, but the set of people who have led and managed Mozilla and participated in Mozilla, have built something so much richer than anybody envisioned in 1998 or ’99.

Netscape was looking for a way to have an alternative in the marketplace to IE and Netscape’s goal of course, was to be a successful company. So their management was very forward-looking and was willing to consider and then implement a pretty radical solution at the time, which was open-source and free software.

But by the time Firefox had come along, we had expanded the set of people who understood that the browser was important and that Firefox really made a difference in internet life to include those who were more on the evangelism and outreach and adoption side. And so for an open source project, we were one of the early projects to go beyond software developers writing code to include evangelism and outreach within consumers

Wired: What sort of changes did we start on the open web besides people generally not being vulnerable to Active X hacks?

Baker: Today open source and open source in browsers was not surprising. But in that era, it was. And it was a radical change. IE6 was a bad experience for consumers, but it was a terrible for developers. Not only it was technically bad, but it was closed and you couldn’t do much with it.

In fact, Tim O’Reilly described Firefox as the “Oxygen for Web 2.0″.

Before that, with IE, everything was secret. All the innovation had to run through the Microsoft technology stack and the Microsoft business stack. And again, this is in particular to Microsoft, some characteristics that are closed systems, you know from top to bottom is controlled by one company has some convenience factor. But it has also some controlling and centralizing factor. That turned out to be not productive on the web and so Firefox broke all that open.

Wired: Can we draw a path from Firefox 1.0 to the HTML5 standard that makes it possible to do so much more in the browser?

Baker: I think HTML5 is one area where Mozilla has done very poorly at actually communicating what we have done. We were have been a central driving for HTML 5.0, long before it was popular — from even before Firefox hit. So that would be 2003, when we were just a new little foundation. We didn’t have a product yet. We were founding members of the HTML5 working group. W3C wasn’t interested in HTML 5.0, and didn’t think that it was necessary. They thought that the semantic web work was more important.

And so basically HTML 5 was not welcome. We were a founding part of the working group, which is what kept HTML5 alive.

The standards piece is very important to us, and we continue to do that. We have been a force in moving video to the web. We’re currently also a force in bringing in a bunch of web APIs, new APIs, so that you can access mobile devices through the web. I say through the browser but it doesn’t need to look or feel like a browser, so that the web has the capabilities to access accelerometers and cameras and all the things that mobile devices have that the old machines don’t.

Wired: We’re talking just a few days after the billion dollar purchase of Instagram, which hardly has a website. This is a little cliche, but there still is this battle between the open web and closed web and HTML5 and apps. Has the open web lost the war, as our cover story declared?

Baker: No. The web has not lost the war. I don’t think the issue is about HTML5 versus apps‚ because a lot of apps use HTML5 and so on. The question really is, there is the interconnected, distributed, broad nature of the web, and the app mode which in some ways is quite different. The web as a platform is the most powerful platform we have ever seen. In the last few years we’ve seen the rise of new, exciting platforms, iOS in particular, and Android. And so now were are in a setting where we don’t just have one platform called the web that people are interested in; we have multiple platforms.

We know that there’s a bunch of things about apps that people really like. They’re lightweight; they’re more focused on a single task; they’re not as broad as a browser and the whole web. You get them on your device and it feels really nice. For developers, there is a little bit of a tradeoff. Some aspects of development are much easier because you are just putting it on a client machine. On the other hand, you are deeply controlled by Apple or Google.

And so, what we are working on at Mozilla is to say, ‘How do we take the power and richness and vitality of the web as a platform and bring it to the apps world?”

When you are describing it to people — again it’s a little bit like the browser‚’Oh! That sounds nice but who would ever do that?’ and ‘The existing platforms are already entrenched and that all sounds a little abstract.’ Well, you know, we have seen that before and it’s hard to imagine, it’s hard to feel that those things could change, but, in fact, that’s what Mozilla is.

Wired: In 2005 you did an interview with Charlie Rose and then he asked you can were you thought you be in like 5 years and you said, ‘I don’t know. Maybe Mozilla or maybe something else,’ then as it turned out it‚ it’s Mozilla. What kept you there?

Baker: The main answer is that the importance of what Mozilla is doing hasn’t changed. The question of whether you or I or any person is actually going to have any control over our Internet life is still very real. It’s even scarier today — we are engaging in such a high degree of self-surveillance.

It is an open question whether we have any control over that. And if so, how and who would want to build that and who is going to do the oddball thing of trying to build that when it’s not exactly clear how do you make money out of it?

I do not want to live in a Big Brother world and I don’t want whether it’s a government and I don’t want to live in it even in a commercial setting even if I get some convenience back.

The web can be more than commercial organization; it can be more than Silicon Valley; it can be global; the web can be us; and you know, I might have the place in this world, too. So, that motivates me a lot. There is still a lot to do and I think the answer has been when I think of about what’s the best place to build the kind of web I want to live in, Mozilla continues to be that place.

Wired: But given that many people see Facebook as mostly their web these days, or spend a lot of time in Foursquare or Instagram‚ are they unhappy as they were in the IE6 days? It seems like a lot of the open-web movement, things like activity streams, have just petered out. People seem to be okay with closed networks.

Baker: I don’t think people are as unhappy as they were. But also keep in mind when we were building Firefox, we didn’t anticipate reaching the kind of marketshare that we did.

Our goal in building Firefox was to provide a better alternative, and ideally, to have enough impact to be able to move the industry. That’s our same goal right now. And so for us, our success criteria are that we offer an alternative; and that enough people use it that it’s viable.

Because at that point, you or I, we can use it or we can say, for this part of my life which is more sensitive than other parts, I have an alternative. I’m perfectly happy with everything that is going on for 90 percent of my life, but there’s 10 percent of it where I am not actually sure that that system works for me. And there is an alternative that’s technically excellent and the rest of the Web will recognize it enough that it works.

And to put in front of people the promise that things can be different‚ not just the promise — the example — because that is when you know how happy people really are. I think this sense that people are totally happy with the way things are, well, it’s not until we actually put a product in front of them and test it and see if that’s true.