Yesterday, I watched a building in Cambridge, MA get dismantled. In speaking to the foreman, I learned that 21 Osbourne Street was previously home to two high-tech companies. The original tenant was an iconic brand whose product quickly become irrelevant in the digital world. The next tenant - who has since moved out - is still thriving, but faces huge risks as its product becomes a commodity. Now, the plot on Osbourne will be home to a fast-growing, cutting-edge company in an entirely different space: pharmaceuticals. Who will be the fourth tenant? In other words, what will be the next industry to require this coveted piece of land in the midst of MIT's campus? I shot this iPhone video entitled "Creative Destruction, Literally." This is my first attempt at shooting and editing video, so thank you for your patience. Enjoy.
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Remember this Google commercial? Well, it is a brilliant idea that I saw put into action. My friend and co-worker just had a baby girl. About three weeks after the birth, he created a Google account for her. Here is an email I sent her.
Google, rather quietly, released a new Doc product called Fusion Tables. Tables is a database tool, which means that Google is now matched one-for-one with the Microsoft Office Suite. Like all Doc products, Tables is intuitive, collaborative and integrated with the web, especially location-based data. Tables is not nearly as robust as Access. But most people don't need that much power, which is why Tables is a great tool for anyone with the slightest data analysis needs.
Tables is also focused on being a data repository. In other words, if you have a dataset that you want to share with the world, simply make it "public" on Tables. And vice versa; if you need a dataset, peruse the public tables located here. Right now there are about 100 sets, including Goals at the 2010 World Cup, Coffee Production, and Homicides in Colombia. Testing Tables: Uploading and Analyzing One Data Set The best feature of Tables is the ability to overlay information onto a map. To familiarize myself with this functionality, I needed a rich data set that was not too cumbersome. The Bureau of Labor and Statistics is a natural, so my first test is an analysis of firm size and employment by each state. First, I had to create the table. This could not be any easier. To create a new table you are given three options: From this computer (i.e. an Excel or Access file), From a Google Spreadsheet, or Empty Table. Since I downloaded the Excel dataset from the BLS, I chose the first option: From this computer. The next step is to confirm that the columns are correctly formatted. Amazingly, Google correctly recognized every column. For example, the first column was State, which I thought would have been tagged as text but was correctly recognized as location. The next step is attributing the data. This is key for sharing tables with the public. If you plan on publishing the table, proper attribution is vital, or else it is of little value to the research community. With the file uploaded and the data attributed, it was time for fun: analysis. My first stop was the Intensity Map, which is located in the Visualize drop-down. At first, the data was skewed because it included employment by firm size for all fifty states as well as the United States as a whole. Also, the data was noisy because it included every firm size, ie 0-4 employees, 5-9 employees, etc. Therefore, I needed filters, which were extremely easy to add; simply click the "options" link. Here is a screen shot of the Intensity map showing the number of companies with over 500 employees. Merging Two Tables: Good, as long as you do not need a calculation I ran into my first problem / bug while merging two tables together and then performing a calculation. Basically, I wanted to understand the data on a per capita basis, so I created a second table with state-by-state population going back to 2004. (I made it public here). Merging the two tables was simple. In the original table, I simply clicked on “Merge” and was presented a two question “wizard.” The first question was “which columns do you want to match.” This is equivalent to dragging the cursor between two tables in Access. In this instance, I chose to link STATE data together, so that I would see employment by state along with population. The second question is a no-brainer: which table do you want merged. Next, I wanted calculate the Enterprises per Capita by dividing the population by the number of firms. So I went to Edit, Add Formula and wrote in my command. It didn’t work. For some reason, I could not get a merged table to perform a calculation. My work-a-round was exporting the newly merged table to Google Docs Spreadsheet, and then importing it back in as one table. When I did this, I was able to perform the calculation. This is not an acceptable solution because the table is no longer dynamic. If anyone out there knows what I’m doing wrong, please shoot me a note or write a comment below. Conclusion: A Key Tool for Any Analyst Aside from my inability to calculate, Google Tables is a great resource. My intensity map of firm size is just the tip of the iceberg. Check out these amazing examples. Lastly, Tables has the potential be transformative. Humans advance on data. Right now, there is a vast expanse of data, but it is silo'd across many systems and written in different formats. A central, crowd-sourced repository of data will improve the quality of analysis, all while reducing the time wasted finding, verifying and cleansing. A couple weeks ago, I headed into the backcountry of Banff National Park for a 5 day, 40-mile hike. This was my fourth major hike since 2004, and perhaps the most grueling due to the weather. Eight hours into the hike, the skies opened and did not close until the final morning. So as I slogged through the mud, trying not to step on Grizzly Bear paw prints, I asked myself: why am I schlepping a sixty-pound backpack in cold, driving rain and at the risk of a fatal attack by 500-pound mammal?
One reason is that hiking provides an opportunity to see different aspects of life in new ways. During this trip, I realized that backpacking is a lot like launching a startup. Below, in no particular order, are the reasons why. Limited resources fuels innovation A hiker’s resources are limited to what he can carry (tent, sleeping bag, clothes) and what the forest provides (wood, water). If you forget – or lose – something, it is gone and you better hope that you don’t need it. After a few days of living with such constraints, the mind becomes incredibly inventive. During this trip, for example, we rigged up a sturdy multi-level clothes-drying rack using nothing but branches and logs. During a past trip, we crafted a way to drag our packs across snowfields in order to limit falling through. All businesses but especially start-ups are resource limited. Capital, talent, and time are in short order. As a result, start-ups constantly innovate not only in the products they offer but in the way they operate. My favorite story of innovating to survive is Airbnb, which designed Obama O’s cereal and sold the collector-edition munchies to attendees at the Democratic National Convention. They raised $25,000 to fund their start-up. As start-ups mature, however, they must shed the patchwork operations that they "innovated" during the lean years. Relying too heavily on Excel – or Google Docs – is a prime example. When resources are limited, it is acceptable to cram everything from salary planning to project management into a spreadsheet. As the company proves longevity, it must invest in the proper processes and technologies in order to support sustainable growth. Not doing so is equivalent to using an open fire and rack of branches to dry clothes, despite being out of the woods and having access to an electric dryer. Risk management takes on a whole new meaning Hiking is a risky endeavor. Any number of events can happen on the trail, including getting lost, injuring yourself, running into an aggressive animal or getting hit with a major weather event. These events can easily result in death – and it is usually a slow and agonizing death. But they are all avoidable. With the correct maps and trail descriptions and an ability to read a compass, the risk of getting lost is greatly diminished. (Heck, you can even bring a GPS that pinpoints your exact location, but that takes the fun out of it.) Talking on the trail and hanging your food 100-plus meters away from your tent are both actions that reduce the threat of a bear attack. Throw in bear spray and a general understanding of what to do in the event of an encounter and you’re in pretty good shape. Lastly, reducing injury is common sense: never jump; be careful with your knife and around the fire; stay hydrated, dry and warm; carry a first aid kit. Risk management is dependent upon understanding the probability and severity of an event occurring. Once you understand these two factors, you can triage mitigation. As I walk through the woods, I’m constantly calculating and triage-ing. During this trip, for example, I calculated the risk of a bear encounter to be moderately high; by my calculations there was one Grizzly for every 10 square miles of habitable land, and we were traversing 40 miles. On the other hand, the risk of getting lost was low; the trail was through a valley with steep, rocky mountain faces on each side – the equivalent of bumpers on a bowling alley lane. I adjusted my behavior accordingly. For start-ups, risks lurk around every corner: system outages, patent trolls, legislatures, unethical employees. A founder’s job is to identify, triage and manage these risks. Unfortunately, though, risk management is often sidelined during the frenzy of creating a new product and winning customers. After all, it is difficult to pull oneself away from the exhilarating and vital task of crafting the next generation of a product to draft a contingency plan that may never be used. Founders also have a difficult time shifting money away from R&D and sales and towards risk management expenses like insurance, lawyers, and monitoring systems. Remember how fortunate you are Hiking helps remind me how fortunate I am. I have my legs to carry me, my eyes to take in the vistas and my ears to hear the sounds of rushing mountain waters and high-pass winds. I have also chosen to live a “pre-civilization” lifestyle by sleeping on the ground in a flimsy shelter, pumping water, keeping warm and cooking with fire, and placing myself lower on the food chain. For millions of people this is not a lifestyle choice; 884 million people, for example, do not have access to clean water. Lastly, I’m reminded of the military, who basically hike through the most treacherous places on earth – from the mountains of Afghanistan to the jungles of Vietnam – with one additional risk: enemy fire. Start-up founders are also fortunate. In many ways, founders are responsible for their destiny. They envision an opportunity and have the courage and talent to execute upon that vision. However, there are factors outside of their control that increase the likelihood of success. Health and physical appearance is one example. Success is also dependent on origin of birth and residency. Over the last 400 years, the United States has developed systems and institutions that foster entrepreneurship. In the United States it takes 6 days and only a few hundred dollars to establish a legal corporate entity, whereas in Brazil it is four month journey that could cost more than one thousand dollars. Throw in bankruptcy laws that do not discourage risk taking, a court system that upholds property rights and legal contracts and a functioning insurance market, and innovation flourishes. In short, an entrepreneur operating in the United States has a much greater chance of success than his equally talented counterpart in just about any other part of the world. Stayed tuned to hear the insights from Hike 2012, which will hopefully be in Glacier National. When I began my MBA, I watched this 1998 talk given by Warren Buffett to the students of the University of Florida. It was a guiding light. Now, I'm passing the video onto my wife Hannah, who begins her MBA career the week after next at MIT Sloan. The speech touches on a number of points, and I've done my best to annotate, but the highlights for an incoming MBA student are:
PART 1 - Intro and the MBA Game 2:20 - The MBA Game - Which classmate will you invest in? 7:12 - Investing in Japan 8:25 - Cigar butt approach to investing, i.e. buying stocks valued below working capital PART 2 - Wealth, leverage, and taking a job you love
0:10 - Long-Term Capital Management - Berkshire's bid for the imploding hedge fund 4:30 - On the founder's of LTM: "To make the money they did not have and did not need, they risked what they did have and did need. That is foolish." 4:44 - "If you risk something that is important to you for something that is unimportant to you, it just does not make any sense." 5:37 - On leverage - small upside, big downside 6:55 - "Betas don't tell you a damn thing about the risk of stock" 9:18 - "Work in jobs you love. You're out of you mind if you keep taking jobs you don't like because you think they look good on your resume." 9:50 - "Taking a job you don't like is like saving sex for old age." As I try to understand the debt downgrade and how it will effect the equities markets, I find myself relying on a piece of advice from my valuation professor. “When new information comes to light”, the professor said, “ask yourself: what lever of the ‘value’ formula is being affected?” More specifically, the professor was referring to the perpetuity discounted cash flow (DCF) formula, which is:
Value = Cash Flow / (Cost of Capital - Growth Rate of Cash Flows). The levers are the cash flows generated by the company, the growth rate of those cash flows, and the opportunity cost of capital, i.e. the minimum return acceptable to investors. The purpose of the formula is to discount future cash flows into a net present value. The formula is not perfect, mainly because it assumes constant growth in cash flows, but it is an excellent rule of thumb. If you’re familiar with finance, this is not new and you can probably stop reading. If finance is not your thing, stick with me - you’ll soon understand, I hope. So, what is the key lever being affected by S&P downgrade? It is the cost of capital. The downgrade is a signal that a default is more likely than previously thought. The greater the risk of default, the greater the return required by investors to compensate them for that risk. Of course, this is not cut and dry. US debt investors may have already priced in the riskiness of default, which means treasuries may not swing as widely on the news. Also, if sovereign debt of other nations (like the EU or Japan) is more risky than US debt, than the US is still a “safe haven” and the large pool of buyers will keep prices high and rates low. But for the sake of understanding the fundamentals of the downgrade, lets assume that treasury rates rise. Since the cost of capital sits in the denominator of the value formula, an increase results in a decline in value. Put simply, a rise in the cost of capital with everything else remaining constant results in a lower valuation or stock price. Let’s go one step further and explain how a rise in treasury rates affect the cost of capital of a company. For simplicity purposes, I’m assuming the company is equity-financed, meaning that it does not have any debt. I need to introduce one more formula: The Capital Asset Pricing Model (CAPM). CAPM = risk free rate + beta * (market risk premium) The risk free rate is, well, the treasury rate. Beta, without getting too deep in the weeds, is the riskiness of a particular stock. And the market risk premium is the amount above the risk free rate investors expect to earn by investing in the equities market. If beta and the market risk premium remain constant, than a rise in the risk free rate -- i.e. the treasury rate -- results in a higher cost of capital. To put this all together, I have created an example. Let’s assume a company has an equity beta of 1.1, which means that if the entire market rises the company’s stock will increase too, but at a slightly higher rate. And vice versa: if the market falls, the stock will fall slightly more than the wider market. The risk free rate is the ten-year treasury rate which just last week was around 2.6%. The market risk premium is 4%, meaning that if treasuries are 2.6% than the expected return from investing in stocks in 6.6% (2.6% plus 4%). Thus, CAPM equals: CAPM = 7% = 2.6% + (1.1* 4%) So now that we have our cost of capital of 7%, let’s look at the value of the company. Assume that the company is generating $100 of cash flow and that those cash flows will grow at the inflation rate, about 3%. Thus the discounted value of the company is: DCF = $2,500 = $100 / (7% - 3%) Now let’s look at what happens if all else remains constant but the treasury rate increases to, say, 3.5%. At this rate the cost of capital is: CAPM = 7.9% = 3.5% + (1.1*4%) And the value of the company falls to: DCF = $2,041 = $100 / (7.9% - 3%). In short, a 0.90% increase in the treasury rate will cause the value of our hypothetical company to fall 18%. To get a better picture, I have published a Google Spreadsheet. This morning I updated my About Me section with my Smarterer Excel score. If you're not familiar, Smarterer is a Boston-based start-up that offers a variety of technical skills tests, such as Google Search, Photoshop, Foursquare, Python - you name it. The tests are multiple choice and employ an adaptive rating system; this approach allows Smarterer to assess test-takers in only a few minutes. Upon completion, test-takers can see how they compare to others in the community, and also post their Smarterer score “badges” on other sites. The product is currently in beta.
Overall, I am a fan. Smarterer is solving the asymmetrical information problem plaguing both hiring managers and job seekers. Hiring managers no longer need to guess a candidate's skill level based on a vague resume bullet point. On the flip side, candidates do not need to fear that their skills will be overshadowed by other candidates that exaggerate. In short, Smarterer provides a measuring stick that both companies and candidates benefit by using. Also, I like Smarterer’s approach. All tests are crowd-sourced which will enable the company to scale quickly and stay abreast of new technologies. As with any beta, Smarterer tests have a few flaws. First, the crowd-sourced, multiple-author approach -- while the right approach -- results in inconsistencies between questions. For example, one question on the Excel test was so long-winded that it did not fit on the screen, so I was left scrolling up and down reading between choice A and D. Eventually, time ran out and I got the question wrong. Also, some questions do not lend themselves to multiple choice answers; for example, one question asked about cutting and pasting a cell where the row and column are locked with the “$” symbol. This is an easy question to visualize but in the multiple choice world it is basically an exercise in alphabetizing. Smarterer's success depends on test-takers posting their scores across the digital expanse. The more ubiquitous badges become, the greater the value of the measuring stick. This is true of any standard system. An SAT score or NYC Restaurant Grade means nothing if only a handful of applicants or establishments possess them. Typically, standards are driven by the consumer. The consumers of SAT scores are colleges, so it is no surprise that the test is administered by a non-profit consortium of colleges. The birthplace of standards, the steel industry, was also driven by the consumer: the railroad companies buying steel to lay tracks. Given this logic and assuming that the overall consumer of Smarterer scores are employers, people will not take the test and post their scores until they are required to by potential employers. But perhaps this is an outdated, pre-social network view. All day, every day people exhibit their intelligence, wits, tastes, physical prowess and sense of humor simply because they can. Twitter, Foursquare, IntoNow, RunKeeper are just a few examples. People are naturally motivated - and increasingly getting comfortable with - outright displays of emotions, thoughts and talents. What will motivate you to share your score? Will you only take the test and share your score in order to land your next job? Or will you share your score because you want the world to know just a little bit more about you? Please let me know your thoughts. If you don’t want to use the comments section, please email me directly. A few weeks ago, while on my roof, I tweeted a picture of the Barnes & Noble on the north side of Union Square and asked: When will this store close because people stop buying physical books and music? The bigger question, however, is what will replace the B&N? Or, put another way, how will digital distribution of books, music, photos and movies continue to affect the retail real estate market? By my calculations, retailers that sell goods that are also distributed digitally currently account for 381 million square feet of retail space in the United States. These retailers include bookstores, video rental stores, music stores and greeting card stores. Obviously, this number is much lower than it was just a few years ago, considering that the carnage has already occurred in the video rental and music space. Furthermore, this tally does not include photo processing stores, which I estimate accounted for roughly 12 million sq / ft prior to the introduction of digital cameras. To put 381 million square feet in perspective, it equates to:
Will the tailspin for bookstores be as fast as it was for music stores? The inflection point for digital music occurred when consumers buying habits changed from physical albums to single song downloads. In 2006, the unit sales of singles surpassed albums, and that was pretty much the end of the record store. Tower Records, the icon of the industry, filed for bankruptcy in August of 2006. Bookstores have not had their "2006" moment, yet. As you can see from the chart below, physical books outsell eBooks by about double. But the gap is quickly narrowing, and a simple trend line suggests that physical and eBooks unit sales will converge 2014. This is 7 years after Amazon launched the Kindle, the first viable eReader. The spread between the first viable music device, Apple's iPod, and the demise of the music store was only 5 years. Greeting card stores and greeting card "aisles" account for 25 million of the the 382 million square feet that will be vacated due to the digital revolution. As of today, the card market is stable. But eventually buying, writing and sending a physical card will seem as anachronistic as renting a video from a video store. Postagram, a three-month-old iPhone and Android app, melds the physical and digital world by allowing people to send personalized photo postcards to any US address for $0.99. Postagram will replace the postcard, thank you card and "thinking of you" card. Traditional greeting cards will also be digitized, thanks to the iPad and other tablets. Why go to a store, buy a card, write the card out and take the card to the post office when you can simply hand write the card on a touch screen and have the vendor print and ship it your mother? In closing, the retail real estate market will shed more than 300 million square feet of space in the next few years. The bulk will come from bookstores and the final death throws of the music and video rental space. Greeting card space will be stable for a few more years, but by 2020 they will be extinct, too. Since there is not a new industry to fill the vacant space, demand for retail real estate and construction will be softer during this period. In another blog post, I will explore the exact dollar impact on the market. I first became interested in industrial design upon learning of "suicide doors." Early cars were often designed with doors that hinged behind the passenger. On one hand, this was an excellent design: it allowed passengers to enter and exit vehicles with great ease. However, there was one major flaw. In the event of an emergency exit, the doors would catch and drag the passenger. Hence the name: "suicide doors." Today, there are numerous examples of "suicide door" designs, i.e. grand intentions but disastrous flaws. There are also designs that are so simple and obvious that you find yourself scratching your head and wondering: "Why did it take XYZ company so long to come up with this?" Below are two designs that gave me pause. As I spot more designs, I'll share them here as an ongoing series. Please send me any design examples that you feel deserve mention in the either the Hall of Fame or Hall of Shame. Coca-Cola Vending Machine: A simple design shift reduces motion and prevents you from forgetting change A few weeks ago, a new vending machine was delivered to my office. It seemed like a standard vending machine: seven-ish feet tall, glowing lights, the constant hum of a refrigeration motor. This machine, however, had a minor modification. Typically, vending machines collect money and dispense change in the same area: the right side about 5 feet from the floor. The two functions - taking money and giving change - are similar so it is logical that they be placed in the same vicinity, right? Not necassarily, as this machine proves. In the new machine, the change and the soda are dispensed in the same area. The benefits are less movement and a lower chance of forgetting your change. Under the old design: you insert your money, chose your soda, collect your soda, and then return to to "money area" to collect your change. The new design completely removes the last movement of returning to the "money area" because the collecting the soda and the change movement are integrated into one. This is a 25% reduction in movement. A web or mobile designer that reduces the number of clicks to make a purchase by 25% would be considered a rock star. In summary, the key lesson from the Coke machine is that similar functions do not need to be performed in the same physical area. Touchscreens on Headrests: Or how I tried to relax while someone played Tetris on the back of my skull. No one can complain about personal televisions on airplanes. Good riddance to the days of being forced to watch such classics as Flubber or Legally Blonde 2.* Welcome to a world of live television and on demand movies. The design, however, fails in the way passengers operate the televisions. Some - not all - airlines have adopted touchscreens. The benefit of the touchscreen is that the airline does not need to install and maintain separate remotes. The disadvantage - the "suicide door" if you will - is that the touchscreen is directly in back of the person sitting in front of you. Every channel change or volume adjustments results in a slight but agitating tap to the back of the head. The problem is exacerbated by two factors: first, people unfamiliar with touchscreens who do not realize you just have to gently tap, not violently push; and the introduction of touch-based video games. In summary, well designed products and solutions cannot adversely affect others. I call this the "secondhand smoke test" or "libertarian test." Whatever name you chose, airplanes with touchscreen televisions flunk. ---------------------------------------------------------- *This is not a gibe at the original Legally Blonde, which was awesome. A few weeks ago our friend from Delhi, India visited. As a WSJ reporter, Shefali is naturally inquisitive, so she asked: "Jon, what was your reaction to the Bin Laden death?"
After some thought, I responded: "It made me realize exactly how much technology has changed over the past decade." Flash back to Tuesday September 11, 2001. I was driving from Jackson, MI to Mackinac Island. I was anxiously watching the clock because at 9 AM I needed to find a store that sold CDs. Bob Dylan's Love And Theft album was dropping; as a huge Dylan fan I could not wait to hear the follow-up to the near flawless Time Out of Mind. I pulled off at a few exits but came up empty. Finally, I found a Walmart in Mt. Pleasant. I was no more than fifteen feet into the Supercenter when a man came up to me. "We're under attack!" "What?" I asked the man. He was straddling the line between burly and obese, and dressed in camouflage. "They - Saudi Arabia - or one of those countries - attacked New York." To this day, I'm still impressed that the man fingered Islamic extremists. My initial reaction, I'm embarrassed to say, was Russia, maybe China. A decade since the end of the Cold War and that was still my lens. After digesting the news in the electronics section, we canceled the Mackinac trip and turned back to Jackson. When we arrived home, we tuned into cable news. Like fifty percent of the homes in the nation, the house did not have Internet. With the Towers felled, the Pentagon ablaze and a mysterious plane down in Pennsylvania I was left with one final task: find out how my friends in New York and Washington were doing. I paced around the house, dialing friend after friend on an old, clunky cordless phone. At 7 PM, I switched to my Motorola StarTac. Flash forward to May 1, 2011. In many ways, very little has changed. We still put pants on in the morning, use a stove to cook breakfast, a car to get around. When it is hot, we put on air conditioning; when it is cold we turn up the thermostat. The way we gather and share information, however, has changed dramatically. Music is the first example. September 2001 was the crossroads for the music industry. In the preceding months, Napster launched, disrupted the music industry forever, and then shuttered. The world had a taste for digital distribution but there was no easy-to-use, reliable portable music system. That would not happen for another two months: Apple shipped the first iPod on November 10, 2001. So on that fateful morning when I wanted my Dylan, I knew the CD would soon be anachronistic but it was the only solution. And I wasn't alone. Music sales hovered around $14b in 2001. Today, sales are half that and falling precipitously. Perhaps the biggest revolution during the 10 years between September 11 and Bin Laden's death is the ubiquity of the Internet and the platforms it has enabled. In 2001, it was completely normal for a middle-class, educated home in the richest nation on the planet to not have Internet. Now, not only do most American's have Internet but the Internet has become accessible and powerful in developing nations, such as Pakistan. Over the last decade, Internet access in Pakistan has grown 1,000-fold to reach 10% of the population, or about 17 million people. In short, we've gone from a world where a comfortable American could not email friends from home to one in which a man in Abbottabad, Pakistan can broadcast - in real time and at zero cost - the raid on Bin Laden's compound. Lastly, and most obviously, the way we connect has changed. In 2001, communication was "one-to-one," meaning I called or emailed friend X, then friend Y and so on. Facebook and Twitter, which would not be invented for another two and half years and five years, respectively, enable "one-to-many" communications. These services are incredibly efficient during times of distress. Had Facebook been as ubiquitious as it is today, it would have taken me just a few seconds to learn the status of the dozen or so people I knew in New York. |
JONATHAN STEIMAN
I'm the Founder and CEO of Peak Support. This blog is my take on early-stage companies and innovation. Every so often, there may be a post about culture, networking, family -- you name it. After all, what is a blog if it isn't a tad bit unstructured.
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