Capitol showdown
Budget deal hanging mid-air
Markets wait for news
Budget deal hanging mid-air
Markets wait for news
Wednesday, October 16, 2013
Tuesday, October 15, 2013
The Haiku of Finance for 10/15/13
Bail out your grandma
Bank will pay her benefits
Send the bill to you
Bank will pay her benefits
Send the bill to you
JPMorgan Chase Will Bail Out Your Grandma For Uncle Sam
JPMorgan Chase announced that it will make good on its banking clients' Social Security and other benefit payments in the event Uncle Sam decides to turn deadbeat. I did a double take when I heard that on NPR this morning, and I read the article to be sure I hadn't misunderstood something. I can draw one of two implications. Scenario number one is that JPM is supremely confident that its cash horde will withstand a one-time delay of government payments and it won't get hit with any more SEC fines or forced settlements. The alternative is that JPM knows something no one else could know about whether it has its own backstop from the US government.
Such an guarantee is very unusual from a SIFI. Most investors are nonchalant about hedging the possibility of a US default on its shorter termed Treasury obligations. It sure looks like financial advisors and even portfolio managers haven't explored hedging with hard assets or futures contracts on non-US currencies. Central banks are making appropriate preparations but the mention of increasing dollar swap lines makes me LOL. If people panic and sell Treasuries the first thing they'll do is get rid of US dollar proceeds as fast as possible. Central bank dollar swaps are just as likely to amplify a run on the dollar as mitigate it.
It's too late for your grandma to open a bank account at Chase to seize on this sweet deal. The next few days will reveal whether one was necessary to bail her out.
Such an guarantee is very unusual from a SIFI. Most investors are nonchalant about hedging the possibility of a US default on its shorter termed Treasury obligations. It sure looks like financial advisors and even portfolio managers haven't explored hedging with hard assets or futures contracts on non-US currencies. Central banks are making appropriate preparations but the mention of increasing dollar swap lines makes me LOL. If people panic and sell Treasuries the first thing they'll do is get rid of US dollar proceeds as fast as possible. Central bank dollar swaps are just as likely to amplify a run on the dollar as mitigate it.
It's too late for your grandma to open a bank account at Chase to seize on this sweet deal. The next few days will reveal whether one was necessary to bail her out.
Monday, October 14, 2013
Due Diligence on Small VCs and Angel Groups
The largest VC funds have the resources to perform legendary feats of due diligence on startups. They can hire private investigators and run background checks to verify that entrepreneurs really are who they say they are. Entrepreneurs have little comparable power to investigate investor groups unless they've had training as private investigators, law enforcement officers, bank examiners, forensic accountants, investigative journalists, or intelligence analysts. This asymmetric relationship cries out for remedy.
The National Venture Capital Association and Western Association of Venture Capitalists have very well-defined criteria for membership. Smaller VC funds and angel groups will fly under NVCA's radar and escape notice. Checking out investors through the National Association of Seed and Venture Funds or National Association of Venture Forums would help if either of those organizations had a verifiable address, contact person, or website. Those all seem to be dark at the time of this writing. The Angel Capital Association and Small Business Investor Alliance are active with venture investors. The National Business Incubation Association tracks the enabling ecosystem for entrepreneurs. If I were a startup, I would inquire with those types of organizations to see if the VC/PE/angel investor promising to commit to me has a verifiable reputation.
Local chambers of commerce can be a source of background info on prominent venture investors if they're in traditional hotbeds of startup activity. Read that as Silicon Valley, Silicon Alley, Boston/Cambridge, and North Carolina's Research Triangle. Startups in other parts of the country used to have to wing it the old fashioned way by asking around local merchant groups about their prospective investor's reputation. That is about to change in a big way.
The crowdfunding revolution will be a blessing and a curse for both investors and entrepreneurs. Startups will face more reporting requirements but a cottage industry of advisers will spring up to help them. Crowdfunding portals must verify the status of their accredited investors before they can commit money, so a portal's validation is a clear indicator to a startup that a prominent investor has some bona fides. The non-accredited investors are a different story, so startups must accept the risk that those folks are just like their mom and dad putting in a few hundred bucks for gas money. This revolution will not be televised - it will be webcast, with embedded data.
BTW, you won't find Alfidi Capital listed in any of those national VC/PE organizations at the present time. I am what I say I am: a non-accredited investor with lots of Web opinions. I'm on several crowdfunding portals as a spectator rather than an investor, and whatever I do on those portals will be in accord with what the SEC allows someone of my status to do. If my cash and sweat equity investments in a handful of startups pay off, my status will change overnight and I'll be driving a Ferrari to meet VCs instead of my old Ford Mustang. Right now I use crowdfunding portals to educate myself on startups in my favorite sectors and watch angel groups I've never seen before. They all have to disclose their status and I get to see some of their potential deal flow. That's my asymmetric remedy.
The National Venture Capital Association and Western Association of Venture Capitalists have very well-defined criteria for membership. Smaller VC funds and angel groups will fly under NVCA's radar and escape notice. Checking out investors through the National Association of Seed and Venture Funds or National Association of Venture Forums would help if either of those organizations had a verifiable address, contact person, or website. Those all seem to be dark at the time of this writing. The Angel Capital Association and Small Business Investor Alliance are active with venture investors. The National Business Incubation Association tracks the enabling ecosystem for entrepreneurs. If I were a startup, I would inquire with those types of organizations to see if the VC/PE/angel investor promising to commit to me has a verifiable reputation.
Local chambers of commerce can be a source of background info on prominent venture investors if they're in traditional hotbeds of startup activity. Read that as Silicon Valley, Silicon Alley, Boston/Cambridge, and North Carolina's Research Triangle. Startups in other parts of the country used to have to wing it the old fashioned way by asking around local merchant groups about their prospective investor's reputation. That is about to change in a big way.
The crowdfunding revolution will be a blessing and a curse for both investors and entrepreneurs. Startups will face more reporting requirements but a cottage industry of advisers will spring up to help them. Crowdfunding portals must verify the status of their accredited investors before they can commit money, so a portal's validation is a clear indicator to a startup that a prominent investor has some bona fides. The non-accredited investors are a different story, so startups must accept the risk that those folks are just like their mom and dad putting in a few hundred bucks for gas money. This revolution will not be televised - it will be webcast, with embedded data.
BTW, you won't find Alfidi Capital listed in any of those national VC/PE organizations at the present time. I am what I say I am: a non-accredited investor with lots of Web opinions. I'm on several crowdfunding portals as a spectator rather than an investor, and whatever I do on those portals will be in accord with what the SEC allows someone of my status to do. If my cash and sweat equity investments in a handful of startups pay off, my status will change overnight and I'll be driving a Ferrari to meet VCs instead of my old Ford Mustang. Right now I use crowdfunding portals to educate myself on startups in my favorite sectors and watch angel groups I've never seen before. They all have to disclose their status and I get to see some of their potential deal flow. That's my asymmetric remedy.
Venture Capital and Private Equity Around the Glorious Roundtable
I get invited to the most mind-blowing events. My definition of "mind-blowing" is highly intellectual and does not involve anything illegal or unethical, so most human beings probably won't want to hang out with me. That's okay. They'd cramp my style anyway. Check out how I roll. Yo! I attended a Silicon Valley roundtable event last Friday that must remain nameless because it was organized by private parties who do not seek publicity. There wasn't even a round table in the room. Several entrepreneurs and investors attended by invitation only and the organizer allowed me to attend as a guest. Wonderful topics lined the agenda and I shall discuss them in oblique terms. Prepare to be entertained.
Flying cars have been on the dream list of inventors since the Jetsons were on TV. I got to examine real working prototypes of flying cars at the US Army Transportation Museum in 1995. None of them ever had serious capabilities. Entrepreneurs are now developing flying cars that convert from ground mode to airborne capability. Modern contraptions remind me of the Bell-Boeing V-22 Osprey program with propellers to switch from VTOL to horizontal flight. Rotary wing aircraft can autorotate into the ground in the event of a mechanical failure, which saves lives but isn't pretty to experience. Twin-rotor aircraft have no such option if something fails while hovering during a VTOL event. A ballistic parachute that deploys automatically upon engine failure may solve the problem.
I no longer believe the bull story for further miraculous economic growth in China. Many others still do and that's okay. Someone needs to be long in case I ever go short. China joined the WTO in 2001 and is now inextricably linked to the world market. Its role as the world's factory is ending because its increasing wages have priced it out of low-cost manufacturing. China needs to pay more attention to WIPO if it wants credibility. San Francisco may become the first renminbi trading hub in North America once China makes its currency fully convertible. Western investment banks are opening offices in Shanghai and that city is the first in mainland China to have a free trade zone. My MBA alma mater USF has a strong interest in China and it is hosting a conference on China's financial reform in a couple of weeks. I have already registered to attend because I love learning stuff. The conference is free to USF-affiliated people. Stolen Valor frauds who prey on veterans will not be allowed to enter the event. You know who you are, and so do I.
There are such things as credentials in business valuation. NAVCA offers certification in business valuation and appraisal. This knowledge comes in handy for business brokers who buy and sell privately owned businesses. I think it also comes in handy for fraud investigators. I'm not saying there's any fraud in Silicon Valley. No sir-ee-bub, not me.
Santa Clara University has a Global Social Benefit Incubator (GSBI) that launches non-profits. One such non-profit is Literacy Bridge. They distribute single-touch audio books loaded with knowledge of agribusiness and sanitation in developing countries with low literacy levels. The device is meant to be shared via a local subscription. Literacy Bridge collects use case data on the number of activations, volume level, and playback times from each audio book. This proves that big Data can reach rural areas that do not have WiFi or landline telecom infrastructure. Societies with oral traditions have different connectivity speeds.
Executives from large publicly-traded companies will share their growth lessons with pre-revenue stage startups. Non-dilutive financing options include licensing and royalties, but my readers have heard me mention that in other blog posts. The caveat is that non-dilutive financing takes longer to grow a company. The IPO must have a good rationale; it can't be just to return capital to early investors. Entrepreneurs must tell early investors that growth takes a long time, to set their expectations for a realistic timeline.
Freedom House near San Francisco provides a refuge for victims of human trafficking. Poverty is a supply-side problem driving women into servitude and exploitation. California law now recognizes underage solicitors as victims rather than criminals. Freedom House's aftercare referrals come from law enforcement. They do important work. I believe Somaly Mam would approve.
Space . . . the final frontier. It won't be that way for long. Space Tango is an incubator for space-oriented startups, although it's quite a ways from where I hang out in NorCal. The Silicon Valley Space Center is hosting a conference on "Launching Commercial Space Enterprises" this coming weekend. I can't attend due to prior commitments and I don't normally pay entrance costs higher than zero. It's probably worth the time of some VCs.
I would like Venture Capital Journal to publish more stories on the unfulfilled promise of the mobile / Big Data / cloud trifecta. If they don't, I certainly will. My theory as of today is that the Holy Grail of Big Data remains unrealized because too few IT practitioners have applied ROI-type metrics to compare their investments in Big Iron and the cloud. It's like my experience with portfolio managers in finance. Almost all of them rely on folk wisdom, unguided guesswork, and rumor instead of applying the metrics I read in Buffettology books on Warren Buffett's deep value investing. I think the IT crowd is the same way. IT pros rely on their subjective preferences for technology instead of the hard metrics of Cloudonomics. Buffettology and Cloudonomics are often cited, sometimes read, and rarely implemented. That's why Wall Street holds as much unfulfilled promise as mobile Big Data in the cloud. That's also why the few people who do read those books can win in life.
These topics appear to be unrelated. Entrepreneurs and their investors can track them all and make sense out of unrelated matters. That's just how we think. Great minds are divergent and polyphasic. Genius investors in venture capital and private equity discuss these things all the time, even when we're not around a glorious roundtable.
Flying cars have been on the dream list of inventors since the Jetsons were on TV. I got to examine real working prototypes of flying cars at the US Army Transportation Museum in 1995. None of them ever had serious capabilities. Entrepreneurs are now developing flying cars that convert from ground mode to airborne capability. Modern contraptions remind me of the Bell-Boeing V-22 Osprey program with propellers to switch from VTOL to horizontal flight. Rotary wing aircraft can autorotate into the ground in the event of a mechanical failure, which saves lives but isn't pretty to experience. Twin-rotor aircraft have no such option if something fails while hovering during a VTOL event. A ballistic parachute that deploys automatically upon engine failure may solve the problem.
I no longer believe the bull story for further miraculous economic growth in China. Many others still do and that's okay. Someone needs to be long in case I ever go short. China joined the WTO in 2001 and is now inextricably linked to the world market. Its role as the world's factory is ending because its increasing wages have priced it out of low-cost manufacturing. China needs to pay more attention to WIPO if it wants credibility. San Francisco may become the first renminbi trading hub in North America once China makes its currency fully convertible. Western investment banks are opening offices in Shanghai and that city is the first in mainland China to have a free trade zone. My MBA alma mater USF has a strong interest in China and it is hosting a conference on China's financial reform in a couple of weeks. I have already registered to attend because I love learning stuff. The conference is free to USF-affiliated people. Stolen Valor frauds who prey on veterans will not be allowed to enter the event. You know who you are, and so do I.
There are such things as credentials in business valuation. NAVCA offers certification in business valuation and appraisal. This knowledge comes in handy for business brokers who buy and sell privately owned businesses. I think it also comes in handy for fraud investigators. I'm not saying there's any fraud in Silicon Valley. No sir-ee-bub, not me.
Santa Clara University has a Global Social Benefit Incubator (GSBI) that launches non-profits. One such non-profit is Literacy Bridge. They distribute single-touch audio books loaded with knowledge of agribusiness and sanitation in developing countries with low literacy levels. The device is meant to be shared via a local subscription. Literacy Bridge collects use case data on the number of activations, volume level, and playback times from each audio book. This proves that big Data can reach rural areas that do not have WiFi or landline telecom infrastructure. Societies with oral traditions have different connectivity speeds.
Executives from large publicly-traded companies will share their growth lessons with pre-revenue stage startups. Non-dilutive financing options include licensing and royalties, but my readers have heard me mention that in other blog posts. The caveat is that non-dilutive financing takes longer to grow a company. The IPO must have a good rationale; it can't be just to return capital to early investors. Entrepreneurs must tell early investors that growth takes a long time, to set their expectations for a realistic timeline.
Freedom House near San Francisco provides a refuge for victims of human trafficking. Poverty is a supply-side problem driving women into servitude and exploitation. California law now recognizes underage solicitors as victims rather than criminals. Freedom House's aftercare referrals come from law enforcement. They do important work. I believe Somaly Mam would approve.
Space . . . the final frontier. It won't be that way for long. Space Tango is an incubator for space-oriented startups, although it's quite a ways from where I hang out in NorCal. The Silicon Valley Space Center is hosting a conference on "Launching Commercial Space Enterprises" this coming weekend. I can't attend due to prior commitments and I don't normally pay entrance costs higher than zero. It's probably worth the time of some VCs.
I would like Venture Capital Journal to publish more stories on the unfulfilled promise of the mobile / Big Data / cloud trifecta. If they don't, I certainly will. My theory as of today is that the Holy Grail of Big Data remains unrealized because too few IT practitioners have applied ROI-type metrics to compare their investments in Big Iron and the cloud. It's like my experience with portfolio managers in finance. Almost all of them rely on folk wisdom, unguided guesswork, and rumor instead of applying the metrics I read in Buffettology books on Warren Buffett's deep value investing. I think the IT crowd is the same way. IT pros rely on their subjective preferences for technology instead of the hard metrics of Cloudonomics. Buffettology and Cloudonomics are often cited, sometimes read, and rarely implemented. That's why Wall Street holds as much unfulfilled promise as mobile Big Data in the cloud. That's also why the few people who do read those books can win in life.
These topics appear to be unrelated. Entrepreneurs and their investors can track them all and make sense out of unrelated matters. That's just how we think. Great minds are divergent and polyphasic. Genius investors in venture capital and private equity discuss these things all the time, even when we're not around a glorious roundtable.
Alfidi Capital Attends Cleantech Open Western Region Innovation Showcase 2013
I can't get enough cleantech action. My participation in the Cleantech Open as a mentor enabled me to attend last week's Western Region Innovation Showcase for 2013. I am very impressed with one of the startups that participated in CTO this year: RePower Capital, a matching service connecting institutional investors with commercial-scale renewable energy projects. The other startups at the showcase addressed energy management, environmental remediation, manufacturing, and other sectors. It's good to know that CTO has now found a permanent home at Xerox's PARC.
Notable local officials were out in force to tout California's business appeal. The mayor of Fremont mentioned the city's foreign trade zone and expedited permitting. Think Silicon Valley and the Fremont Chamber of Commerce have more details for those of you considering setting up shop. Other cities in California have jumped on the innovation bandwagon ever since San Francisco proclaimed itself the "Innovation Capital of the World" and Fremont's FAST Innovation district strategy is the latest one I've seen.
Nancy Pfund from DBL Investors gave the morning keynote. Her portfolio includes Pandora and Tesla Motors, so she knows what she's talking about. She believes Tesla's success disproves the myth that payback on a cleantech investment takes forever. Her experience indicates that cleantech investments can hedge other investments that have regulatory difficulties (I'm thinking hydrocarbon energy and petrochemical manufacturing). Check out Bloomberg New Energy Finance to see continuing investment flows in the cleantech sector. The WilderHill Clean Energy Index (ECO) is the benchmark that Nancy and other cleantech investors use when figuring whether their portfolios are outperforming other broad market indexes. Nancy noted that Elon Musk proves that superstar cleantech executives can become pop culture icons. One other resource she mentioned was PWC's Money Tree report on VC investing, which I'm sure is very useful to startups that want to find the most active VC funds seeking deals.
The policy panel was next, featuring more politically savvy Californians. They noted that the California Public Utilities Commission's renewable portfolio standards (RPS) created a market for renewables, and that cap-and-trade regimes will fund development fulfilling the RPS. Policy change has a very long incubation time and policymakers need the business community's input. I'm pretty sure the organized labor community won't want to hear that but IMHO that's what it takes to make California more competitive. They noted that municipalities have a role in developing infrastructure that makes an area an attractive place to work. I immediately thought about plans to extend BART's reach to San Jose but freight rail links are also important.
I see two major areas for improvement based on what the policy folks had to say about wanting engagement from investors and entrepreneurs. First, the cleantech sector is probably underrepresented among the lobbying efforts in Washington DC and Sacramento. The Apollo Alliance, which helped write the ARRA stimulus/recovery/pork barrel package, has morphed into the BlueGreen Alliance and has Washington's attention. OpenSecrets is a good place to find out whether the cleantech sector is making a level of campaign contributions that will get politicians interested. Second, local governments and chambers of commerce can do a lot more to promote startup incubators and accelerators. I linked to the Fremont Chamber of Commerce above but I don't know whether their representatives attended. I suspect that some Bay Area chambers of commerce aren't aware that incubators exist and need corporate sponsors.
I couldn't stay for the afternoon program because I had another commitment in San Francisco. My work isn't done after mentoring CTO startups. I'm going to put startup accelerators on the radar of the San Francisco Chamber of Commerce. There's enough corporate representation in that chamber to interest a startup seeking funding, and there's enough tech in CTO participants to interest corporate venture investors.
Full disclosure: No position in any companies mentioned at this time.
Notable local officials were out in force to tout California's business appeal. The mayor of Fremont mentioned the city's foreign trade zone and expedited permitting. Think Silicon Valley and the Fremont Chamber of Commerce have more details for those of you considering setting up shop. Other cities in California have jumped on the innovation bandwagon ever since San Francisco proclaimed itself the "Innovation Capital of the World" and Fremont's FAST Innovation district strategy is the latest one I've seen.
Nancy Pfund from DBL Investors gave the morning keynote. Her portfolio includes Pandora and Tesla Motors, so she knows what she's talking about. She believes Tesla's success disproves the myth that payback on a cleantech investment takes forever. Her experience indicates that cleantech investments can hedge other investments that have regulatory difficulties (I'm thinking hydrocarbon energy and petrochemical manufacturing). Check out Bloomberg New Energy Finance to see continuing investment flows in the cleantech sector. The WilderHill Clean Energy Index (ECO) is the benchmark that Nancy and other cleantech investors use when figuring whether their portfolios are outperforming other broad market indexes. Nancy noted that Elon Musk proves that superstar cleantech executives can become pop culture icons. One other resource she mentioned was PWC's Money Tree report on VC investing, which I'm sure is very useful to startups that want to find the most active VC funds seeking deals.
The policy panel was next, featuring more politically savvy Californians. They noted that the California Public Utilities Commission's renewable portfolio standards (RPS) created a market for renewables, and that cap-and-trade regimes will fund development fulfilling the RPS. Policy change has a very long incubation time and policymakers need the business community's input. I'm pretty sure the organized labor community won't want to hear that but IMHO that's what it takes to make California more competitive. They noted that municipalities have a role in developing infrastructure that makes an area an attractive place to work. I immediately thought about plans to extend BART's reach to San Jose but freight rail links are also important.
I see two major areas for improvement based on what the policy folks had to say about wanting engagement from investors and entrepreneurs. First, the cleantech sector is probably underrepresented among the lobbying efforts in Washington DC and Sacramento. The Apollo Alliance, which helped write the ARRA stimulus/recovery/pork barrel package, has morphed into the BlueGreen Alliance and has Washington's attention. OpenSecrets is a good place to find out whether the cleantech sector is making a level of campaign contributions that will get politicians interested. Second, local governments and chambers of commerce can do a lot more to promote startup incubators and accelerators. I linked to the Fremont Chamber of Commerce above but I don't know whether their representatives attended. I suspect that some Bay Area chambers of commerce aren't aware that incubators exist and need corporate sponsors.
I couldn't stay for the afternoon program because I had another commitment in San Francisco. My work isn't done after mentoring CTO startups. I'm going to put startup accelerators on the radar of the San Francisco Chamber of Commerce. There's enough corporate representation in that chamber to interest a startup seeking funding, and there's enough tech in CTO participants to interest corporate venture investors.
Full disclosure: No position in any companies mentioned at this time.
Sunday, October 13, 2013
Alfidi Capital Attends HYSTA Annual Conference 2013
The folks at HYSTA put on a pretty good show at their annual conference for 2013. I lucked out when I got a free ticket at the last minute, and you know I never turn down free learning opportunities. I'm all about empowering the next generation of entrepreneurs. I had never been to the UCSF Mission Bay Conference Center before and I was suitably impressed with the stunning cubic architecture and equally stunning athletic bodies of attractive women working out at the UCSF fitness center. I was further impressed with the large numbers of attractive Chinese women who arrived early for the HYSTA conference. Hello, ladies. My usual convention for describing conferences still holds. I paraphrase the speakers in regular type and add my own observations in italics.
The HYSTA big chiefs' introductory remarks noted that the organization's 15-year history has seen many sponsored startups achieve successful exits. Their first ever CEO Summit in 2005 led to Yahoo's partnership with Alibaba. The HYSTA core mission is unique; it does startup incubation and also sponsors trade missions to China.
Tech exec Sean Maloney gave the morning keynote and advised us all to have our carotid arteries checked during our annual doctor visits, because that can give early warning of the kind of stroke he experienced. Sean thinks humans underestimate long term progress and overestimate short term progress. That explains for me why e-commerce business models took longer to mature than the short VC-derived time horizons of the late 1990s. His graph of Moore's Law drove home the point that exponential growth can lead to sudden limits. The ethnic Chinese audience chuckled when Sean said Google gets fewer searches than Baidu. I just tested that theory with a Baidu search for pics of hot Chinese women, but I couldn't see a search count number on the page. The search also returned mostly Caucasian women. Come on, I can find those on Google. Sean went on to show that consumers have sufficient CPU power in their mobile devices to meet their demand for video, so future tech disruption will be confined to the cloud. The cottage media for VC and tech have lately lamented the disappointing results of Big Data hype. They need only be patient for a few more years. Sean's conclusion for entrepreneurs was to pick one thing with the biggest impact and don't waste a minute. I liked his advice to "laugh because you don't know how long it will last," but I know precisely how long my own life will last.
The conference split into two tracks and I opted to stick with the expert panel on the mobile Internet revolution. Battle Silicon sounded interesting but I figured I'd catch whatever recording ended up on the Web from Ding Ding TV. Anyway, it's a truism by now that mobile sales are outpacing PC sales but the real revenue is now coming from in-app purchases. The panel opined that the Internet of Things will do things smartphones can't (presumably with drones and wearables) using an automobile's connectivity. No one mentioned cars when I first heard about IoT at this year's Maker Faire Bay Area. The experts there assumed mobile connectivity would be sufficient. Using a car as a mobile hub is an evolutionary development. I still expect in-home devices with smart grid interfaces to be the main driver of IoT. Asian markets monetize mobile more than the US with non-US app markets showing strong growth. The US intelligence community's monitoring effort is a very serious issue for app developers, as are national jurisdictions governing the use of data collected from citizens. Say goodbye to all of the corporate theorists who convinced business schools that we live in a borderless world and that said world is flat. Those theories coincided with US hegemony after the Cold War ended. Nationalism is coming back because the US-led developed world is proving to be a poor steward of the global institutions it created - namely the IMF, World Bank, and WTO. The interregnum that comes next will be messy. I was not surprised to hear the panel say that the vast majority of app revenue is from games. Computers were supposed to make our lives more productive. Whenever I'm on a bus or train I see people using smartphones to goof off with games and puzzles. I have yet to see someone using their smartphone to design the longer-lasting light bulb on their way to the office. The panel said games are hard to globalize because preferences are culturally-specific, but IMHO that ignores some major game developments. Some of Atari's early hits like Pac-Man crossed over successfully from Japan to the US. Tetris had no trouble escaping its Soviet prison to worldwide acclaim. Angry Birds is now a global phenomenon. Games that are simple and generic seem to have no trouble crossing cultures.
This panel made several references to Weibo, a major Chinese microblogging phenomenon. Weibo maintains multiple data centers worldwide to support its user experience. That's important to note. A Chinese-language service concerned enough with worldwide latency to have servers outside China shows the importance of their non-domestic users. The panel thinks US app stores have disrupted insular Asian markets to the point that Asian tech companies are forced to reach out to global markets. The tendency for Asian tech companies to start with a pan-Asian market strategy before they go global was something I noticed when LINE presented at the beGLOBAL conference. The smartphone folks on the panel ran down some common startup mistakes: not protecting IP; not protecting the capital structure by documenting early ownership; not understanding their market and revenue model. I recently read something by one of the Web's most renowned serial entrepreneurs that success with a Web business is about enabling people with the convenience of doing the same things they always do. It's not about forcing people to do radically new things. People used to pass the time in public by reading books or newspapers, doing Sudoku and crossword puzzles, or just sitting around. Now mobile enables people to do those same things more easily. Finally, the panel noted that the SME sector is large in China to support mobile marketing channels for business owners. I think there's an opportunity for disruption in real-time localized environmental data. Pollution is regularly bad in many areas, as one panelist noted, and Chinese people want to know conditions before they travel.
The next morning panel was all about games. Programmers get paid more at database companies than game companies because it's harder for database companies to attract talent. Every kid dreams of designing games. A lot of those kids are going to be very disappointed when the bottom eventually falls out of mobile. Consumer spending is stagnant at a historic peak, and Sean Maloney noted above that consumer mobile doesn't need any more disruption. Microconsoles enable new gaming tech, but I wonder how much more blood game developers can squeeze out by porting app games to a large screen. The whole point of app games is to play them quickly while traveling or waiting for some real-world event. Large-screen games are different and have their own subculture of people who connect on the Web to play in teams. IMHO the whole gaming sector depends too much on blockbuster games like Halo. The app revolution was supposed to be about playing many smaller games with shorter development times. Whatever. The panel said game startups should think about monetization and globalization on day one. Didn't these guys listen to the first panel that said globalizing games is hard? They should listen to me instead, because I noted some major exceptions. My ears perked up when the panel made the following very important observations. Rural parts of developing countries have slower Internet connection speeds and less-capable PCs (audio speakers, video graphics cards, etc.) so game developers must scale their game engines to adapt to less robust tech platforms and environments. That says more about the state of enabling infrastructure than anything else. No wonder leading tech companies are pushing the Internet.org initiative to wire the rest of the planet. They know quite well that their growth will halt without WiFi in every African village. The panel recommended that startups only outsource those things they understand but are too costly to do in-house, and these functions must present an opportunity cost of not developing your core tech. They concluded by noting that Silicon Valley does not favor slowly growing a business by reinvesting long-term internal cash flows. That's a relief. I have a couple of angel investments in companies outside of Silicon Valley pursuing just such a long-term strategy.
The next keynote on "Revolution and Death in the Valley" was from tech legends Keith Teare and Kambiz Hooshmand. These guys had tons of things to say, so here it comes in a stream of consciousness. They plugged their Archimedes Labs accelerator. Everybody has an accelerator these days. The ones that matter have big-name VC or corporate backing. The audience responded positively when asked if they now used WeChat more frequently than Facebook. Getting "acqui-hired" means a big firm buys an unsuccessful startup that didn't get a Series a funding round, just to hire the founders. No one will ever acqui-hire Alfidi Capital, for the record. TechCrunch's Deadpool notes startups that die when they hit their "Series A crunch," aka the "second round problem." Risk capital ignores post-seed startups that don't have traction but there's still lots of growth capital available for early-stage startups. Mobile media's future depends on how brands manifest themselves, like old media transitioning online. Keith's magic formula for startups raising money is to target a $200M VC fund with a $2-8M investment on a multi-year timeline; he thinks this will win a second round capital commitment. My solution to these second round problems is crowdfunding. That will dribble out second round capital for years.
The next panel had two generations of entrepreneurs debating the nature of startups. One guy said life is too short to do the same thing as everyone else. Amen, brother. No way will I ever return to someone else's cubicle. Entrepreneurship is a highly personal introspective process with no single correct answer. Tech innovations have reduced friction that financial and physical barriers cause for startup launches. This puts intellectual ability at a premium. VCs want to fund startups that hunt "whales," established businesses with fat margins they can disrupt. Finishing a startup is harder than launching one. A startup's tradeoff is that high-level, high-value success is harder than a smaller goal. Solving a simpler problem is less risky and has a shorter path to success but has a much lower payoff. Serial entrepreneurs often have many modest successes but the largest valuations have been built by a single long-term entrepreneur (i.e., Bill Gates, Steve Jobs). There is no shame in building many small businesses. Big successes come with big problems: lots of employees, regulations, etc. Literary education enables shared feelings across cultural contexts. That's why some startups concepts can propagate globally.
The final panel I sat through was about tech trends in social, mobile, and Big Data. This is one of those meta-themes that's all over Silicon Valley right now because VCs are trying to save their investments in each category by combining them into one big category. User-syndicated video viewrship on YouTube far outpaces officially published content. The panel dude couldn't understand why so many YouTubers republish different versions of a Katy Perry video. Duh! I know why. It's because they're stealing content and want to steer searches to their own channels and get ad revenue. Too many idiots think their lame videos of cat tricks and untalented acoustic guitar covers will benefit from a ripped-off video of Katy Perry showing her goodies. It's just like Chinese companies stealing IP from Western companies doing business there. Sheesh. BTW, Katy Perry is hot and I'd like to see her up close and personal, if you know what I mean. Okay, back to this panel. Maintaining new hire quality while growing is a challenge. Investors judge your success by how much money you've made. Many things are out of your control but you always control your reputation. Good relations with your partners, suppliers, employees, and investors can help you with your next startup even if you fail at one. I'm certain that applies to founders from VC-backed startups even if they don't get acqui-hired.
I've got a couple of random observations from the panel sessions that deserve their own narrative. First, I'm surprised that there aren't more startups applying artificial intelligence to Big Data analytics. Machine learning is another emerging thing in the Valley and I suspect VCs will demand their portfolio companies graft it onto Big Data solutions to save their investments. Second, no one on any of these panels mentioned the importance of API-level security or came up with new ways to generate use case data. I should have asked.
The final keynote was from Evernote's Ken Gullicksen. Much of it was like a sales pitch but the lessons for entrepreneuers were in there. Getting into standard app stores is the short path to globalization but eventually a tech company will need offices in countries' major innovation centers. That helps with cultural learning and adjusting text UI to other languages. I think Evernote Market is an IoT version of Apple's strategy that seeded app demand for the iPhone. The coolest strategy is building your own IoT ecosystem. I've never used Evernote's stuff but it looks like a way to do knowledge management that's more adaptable than Microsoft SharePoint. I've noted several times in previous blog articles that CRM linkages to ERP systems will facilitate Big Data. Evernote seems to accomplish this by embedding its data notes into Salesforce's CRM suite.
Thanks for the free ticket, HYSTA. You can tell that I had a good time at this conference. I learned that Chinese-American tech entrepreneus are a lot like the Indian-American entrepreneurs I've met at TiE Silicon Valley. Self-starters are all about risk, passion, drive, genius, and attitude. I'd rather hang out with American entrepreneurial leaders than the losers I used to know in asset management. The very attractive Chinese women in attendance were a delight to behold in between sessions.
Full disclosure: I later decided not to return to any HYSTA events. I have no ongoing contact whatsoever with anyone who spoke at this HYSTA conference or anyone who is an official at HYSTA. I have never done business in China and I will never do so. Please understand that my comments are those of an independent analyst, not someone who would ever do business in China.
The HYSTA big chiefs' introductory remarks noted that the organization's 15-year history has seen many sponsored startups achieve successful exits. Their first ever CEO Summit in 2005 led to Yahoo's partnership with Alibaba. The HYSTA core mission is unique; it does startup incubation and also sponsors trade missions to China.
Tech exec Sean Maloney gave the morning keynote and advised us all to have our carotid arteries checked during our annual doctor visits, because that can give early warning of the kind of stroke he experienced. Sean thinks humans underestimate long term progress and overestimate short term progress. That explains for me why e-commerce business models took longer to mature than the short VC-derived time horizons of the late 1990s. His graph of Moore's Law drove home the point that exponential growth can lead to sudden limits. The ethnic Chinese audience chuckled when Sean said Google gets fewer searches than Baidu. I just tested that theory with a Baidu search for pics of hot Chinese women, but I couldn't see a search count number on the page. The search also returned mostly Caucasian women. Come on, I can find those on Google. Sean went on to show that consumers have sufficient CPU power in their mobile devices to meet their demand for video, so future tech disruption will be confined to the cloud. The cottage media for VC and tech have lately lamented the disappointing results of Big Data hype. They need only be patient for a few more years. Sean's conclusion for entrepreneurs was to pick one thing with the biggest impact and don't waste a minute. I liked his advice to "laugh because you don't know how long it will last," but I know precisely how long my own life will last.
The conference split into two tracks and I opted to stick with the expert panel on the mobile Internet revolution. Battle Silicon sounded interesting but I figured I'd catch whatever recording ended up on the Web from Ding Ding TV. Anyway, it's a truism by now that mobile sales are outpacing PC sales but the real revenue is now coming from in-app purchases. The panel opined that the Internet of Things will do things smartphones can't (presumably with drones and wearables) using an automobile's connectivity. No one mentioned cars when I first heard about IoT at this year's Maker Faire Bay Area. The experts there assumed mobile connectivity would be sufficient. Using a car as a mobile hub is an evolutionary development. I still expect in-home devices with smart grid interfaces to be the main driver of IoT. Asian markets monetize mobile more than the US with non-US app markets showing strong growth. The US intelligence community's monitoring effort is a very serious issue for app developers, as are national jurisdictions governing the use of data collected from citizens. Say goodbye to all of the corporate theorists who convinced business schools that we live in a borderless world and that said world is flat. Those theories coincided with US hegemony after the Cold War ended. Nationalism is coming back because the US-led developed world is proving to be a poor steward of the global institutions it created - namely the IMF, World Bank, and WTO. The interregnum that comes next will be messy. I was not surprised to hear the panel say that the vast majority of app revenue is from games. Computers were supposed to make our lives more productive. Whenever I'm on a bus or train I see people using smartphones to goof off with games and puzzles. I have yet to see someone using their smartphone to design the longer-lasting light bulb on their way to the office. The panel said games are hard to globalize because preferences are culturally-specific, but IMHO that ignores some major game developments. Some of Atari's early hits like Pac-Man crossed over successfully from Japan to the US. Tetris had no trouble escaping its Soviet prison to worldwide acclaim. Angry Birds is now a global phenomenon. Games that are simple and generic seem to have no trouble crossing cultures.
This panel made several references to Weibo, a major Chinese microblogging phenomenon. Weibo maintains multiple data centers worldwide to support its user experience. That's important to note. A Chinese-language service concerned enough with worldwide latency to have servers outside China shows the importance of their non-domestic users. The panel thinks US app stores have disrupted insular Asian markets to the point that Asian tech companies are forced to reach out to global markets. The tendency for Asian tech companies to start with a pan-Asian market strategy before they go global was something I noticed when LINE presented at the beGLOBAL conference. The smartphone folks on the panel ran down some common startup mistakes: not protecting IP; not protecting the capital structure by documenting early ownership; not understanding their market and revenue model. I recently read something by one of the Web's most renowned serial entrepreneurs that success with a Web business is about enabling people with the convenience of doing the same things they always do. It's not about forcing people to do radically new things. People used to pass the time in public by reading books or newspapers, doing Sudoku and crossword puzzles, or just sitting around. Now mobile enables people to do those same things more easily. Finally, the panel noted that the SME sector is large in China to support mobile marketing channels for business owners. I think there's an opportunity for disruption in real-time localized environmental data. Pollution is regularly bad in many areas, as one panelist noted, and Chinese people want to know conditions before they travel.
The next morning panel was all about games. Programmers get paid more at database companies than game companies because it's harder for database companies to attract talent. Every kid dreams of designing games. A lot of those kids are going to be very disappointed when the bottom eventually falls out of mobile. Consumer spending is stagnant at a historic peak, and Sean Maloney noted above that consumer mobile doesn't need any more disruption. Microconsoles enable new gaming tech, but I wonder how much more blood game developers can squeeze out by porting app games to a large screen. The whole point of app games is to play them quickly while traveling or waiting for some real-world event. Large-screen games are different and have their own subculture of people who connect on the Web to play in teams. IMHO the whole gaming sector depends too much on blockbuster games like Halo. The app revolution was supposed to be about playing many smaller games with shorter development times. Whatever. The panel said game startups should think about monetization and globalization on day one. Didn't these guys listen to the first panel that said globalizing games is hard? They should listen to me instead, because I noted some major exceptions. My ears perked up when the panel made the following very important observations. Rural parts of developing countries have slower Internet connection speeds and less-capable PCs (audio speakers, video graphics cards, etc.) so game developers must scale their game engines to adapt to less robust tech platforms and environments. That says more about the state of enabling infrastructure than anything else. No wonder leading tech companies are pushing the Internet.org initiative to wire the rest of the planet. They know quite well that their growth will halt without WiFi in every African village. The panel recommended that startups only outsource those things they understand but are too costly to do in-house, and these functions must present an opportunity cost of not developing your core tech. They concluded by noting that Silicon Valley does not favor slowly growing a business by reinvesting long-term internal cash flows. That's a relief. I have a couple of angel investments in companies outside of Silicon Valley pursuing just such a long-term strategy.
The next keynote on "Revolution and Death in the Valley" was from tech legends Keith Teare and Kambiz Hooshmand. These guys had tons of things to say, so here it comes in a stream of consciousness. They plugged their Archimedes Labs accelerator. Everybody has an accelerator these days. The ones that matter have big-name VC or corporate backing. The audience responded positively when asked if they now used WeChat more frequently than Facebook. Getting "acqui-hired" means a big firm buys an unsuccessful startup that didn't get a Series a funding round, just to hire the founders. No one will ever acqui-hire Alfidi Capital, for the record. TechCrunch's Deadpool notes startups that die when they hit their "Series A crunch," aka the "second round problem." Risk capital ignores post-seed startups that don't have traction but there's still lots of growth capital available for early-stage startups. Mobile media's future depends on how brands manifest themselves, like old media transitioning online. Keith's magic formula for startups raising money is to target a $200M VC fund with a $2-8M investment on a multi-year timeline; he thinks this will win a second round capital commitment. My solution to these second round problems is crowdfunding. That will dribble out second round capital for years.
The next panel had two generations of entrepreneurs debating the nature of startups. One guy said life is too short to do the same thing as everyone else. Amen, brother. No way will I ever return to someone else's cubicle. Entrepreneurship is a highly personal introspective process with no single correct answer. Tech innovations have reduced friction that financial and physical barriers cause for startup launches. This puts intellectual ability at a premium. VCs want to fund startups that hunt "whales," established businesses with fat margins they can disrupt. Finishing a startup is harder than launching one. A startup's tradeoff is that high-level, high-value success is harder than a smaller goal. Solving a simpler problem is less risky and has a shorter path to success but has a much lower payoff. Serial entrepreneurs often have many modest successes but the largest valuations have been built by a single long-term entrepreneur (i.e., Bill Gates, Steve Jobs). There is no shame in building many small businesses. Big successes come with big problems: lots of employees, regulations, etc. Literary education enables shared feelings across cultural contexts. That's why some startups concepts can propagate globally.
The final panel I sat through was about tech trends in social, mobile, and Big Data. This is one of those meta-themes that's all over Silicon Valley right now because VCs are trying to save their investments in each category by combining them into one big category. User-syndicated video viewrship on YouTube far outpaces officially published content. The panel dude couldn't understand why so many YouTubers republish different versions of a Katy Perry video. Duh! I know why. It's because they're stealing content and want to steer searches to their own channels and get ad revenue. Too many idiots think their lame videos of cat tricks and untalented acoustic guitar covers will benefit from a ripped-off video of Katy Perry showing her goodies. It's just like Chinese companies stealing IP from Western companies doing business there. Sheesh. BTW, Katy Perry is hot and I'd like to see her up close and personal, if you know what I mean. Okay, back to this panel. Maintaining new hire quality while growing is a challenge. Investors judge your success by how much money you've made. Many things are out of your control but you always control your reputation. Good relations with your partners, suppliers, employees, and investors can help you with your next startup even if you fail at one. I'm certain that applies to founders from VC-backed startups even if they don't get acqui-hired.
I've got a couple of random observations from the panel sessions that deserve their own narrative. First, I'm surprised that there aren't more startups applying artificial intelligence to Big Data analytics. Machine learning is another emerging thing in the Valley and I suspect VCs will demand their portfolio companies graft it onto Big Data solutions to save their investments. Second, no one on any of these panels mentioned the importance of API-level security or came up with new ways to generate use case data. I should have asked.
The final keynote was from Evernote's Ken Gullicksen. Much of it was like a sales pitch but the lessons for entrepreneuers were in there. Getting into standard app stores is the short path to globalization but eventually a tech company will need offices in countries' major innovation centers. That helps with cultural learning and adjusting text UI to other languages. I think Evernote Market is an IoT version of Apple's strategy that seeded app demand for the iPhone. The coolest strategy is building your own IoT ecosystem. I've never used Evernote's stuff but it looks like a way to do knowledge management that's more adaptable than Microsoft SharePoint. I've noted several times in previous blog articles that CRM linkages to ERP systems will facilitate Big Data. Evernote seems to accomplish this by embedding its data notes into Salesforce's CRM suite.
Thanks for the free ticket, HYSTA. You can tell that I had a good time at this conference. I learned that Chinese-American tech entrepreneus are a lot like the Indian-American entrepreneurs I've met at TiE Silicon Valley. Self-starters are all about risk, passion, drive, genius, and attitude. I'd rather hang out with American entrepreneurial leaders than the losers I used to know in asset management. The very attractive Chinese women in attendance were a delight to behold in between sessions.
Full disclosure: I later decided not to return to any HYSTA events. I have no ongoing contact whatsoever with anyone who spoke at this HYSTA conference or anyone who is an official at HYSTA. I have never done business in China and I will never do so. Please understand that my comments are those of an independent analyst, not someone who would ever do business in China.
Saturday, October 12, 2013
Friday, October 11, 2013
Alfidi Capital Drops Into DataWeek 2013
Life for Yours Truly isn't all about slogging through investment conferences. I throw in the occasional trade show in the hope I'll learn something new and meet attractive women. DataWeek 2013 and API World fit that bill for me last week.
I didn't have time for the entire conference because it's really a code developer's show and I'm Mr. Finance. I could only attend a select few sessions because I was too cheap to pay for anything but an Expo pass. I noticed that many of the paid seminars had no gatekeeper at the door, so anyone could have walked into a paid session. I hope the conference organizers weren't losing money from freeloader coders wandering around Fort Mason Center.
My first free session was an overview of how SQL queries and Java apps running in a Hadoop ecosystem feed Big Data streams into ERP systems. I don't know code but I know a business problem when I see it. Hadoop apps interact with both transactions and analytics, completing the CRM / Big Data / ERP integration that so many IT pros say they want. This leads me to the belief that knowledge management pros must understand Hadoop. There is no other way for them to ensure that the enterprise's business intelligence effort and predictive analytics are available to the C-suite. That's how tools channel data up the decision chain to support strategy.
Hadoop reminds me of Salesforce's approach to offering cloud ERP solutions, except Hadoop solutions are built on demand. Both types of solutions can be scaled down for small enterprises that can't afford big iron computing. My first take-away from DataWeek is that startups doing manual, customized apps or analytic solutions for B2B customers will fail. Data ecosystems like Hadoop are growing too large for anything but machine learning that automates analytics. Only top-layer KM, heuristics for predictive analytics, and corporate strategy should be subject to manual manipulation. The KM focus should be on structural design, with decision criteria that trigger manual intervention.
I patrolled the Expo floor prior to the heavily advertised beer tasting. I was pleasantly surprised to see several attractive women staffing the booths. Disqus gal, you were the best, and thank you for filling out those jeans so well. The women attending were also cute. It's good to see more women pursuing tech careers. They should pursue me too but I understand if they're focused.
I attended a talk from IBM Analytics about the most important factors in data visualization. I started visualizing what the hot blonde woman in the back row would look like at my place but then I remembered I have a blogging job to do. It turns out there are four pillars governing how analysts should publish visual representations of data: purpose (why), content (what), structure (how), formatting (everything else). Knowing the purpose for assembling a presentation lays the foundation for an iterative design checklist.
Purpose for me means knowing what actions I want to prompt in my audience, such as uncontrollable rage at my opinions. Content covers the data and relationships that matter to me and my audience, like IQ comparisons that demonstrate my intellectual superiority to most of humanity. The IBM guy showed a simple bar chart of how Apple's iPhone revenue was greater than all of Microsoft's revenue, so even two data points can show something powerful. Structure governs the meaning of axes and layouts that reveal relationships, like my relationships with numerous female admirers. That would take too much time to graph so I'll just relate IBM's best practices here. Using 3D graphs distorts data and you can't see intersections with axes when the front 3D thingy obscures what's in back. The human brain is better at comparing angles than circles, so charts with long bars on a common baseline are easier to perceive. Horizontal bars showing binary (either/or) breaks in continuous data frees the vertical axis to sort categories by ranking. Finally, formatting data to show what's important accounts for how users will consume the data. Callouts in geodata reveal something that matters. Using color to indicate quantity forces readers to keep glancing at the legend, which is bad. Color also has cultural context; red-/white/blue means something in the US and France. "Redundant encoding" puts the same data into different visual channels, driving the point into viewers' brains in case the format doesn't translate perfectly. Labeling highlights things, so either make it possible to label outliers (if they reveal something significant) or use them to orient viewers when you label axes. IBM's white paper on successful visualization sums up all of this stuff and so does the author's handy diagram. This knowledge makes me think about the graphs I've seen in oil and gas investment presentations. Formatting the wells' decline rates means everything if scale de-emphasizes the steepness of the decline curve. Readers fooled by logarithmic scales may think declines are gradual in shale wells. I'll look for scale the next time some shale energy promoter shows me his projections.
The only other seminar I had time to check out was on how security architectures can be unified across mobile, cloud, the Web, and APIs. Typical APIs aren't exposed to the general public and API security is enterprise-specific. The security landscape is so broad that it open up APIs as a potential portal for intrusion. Enterprises that support tiered access from public users and internal users (like financial service institutions) must support multiple credentials. I think authentication protocols will have to be built into APIs prior to launch, just like analytics. APIs must do much more than run apps. They collect use case data, feed analytics, provide a security barrier, and define the user experience. Integrating all of these things will require more effort from programmers than ever. I'm glad I'm not a programmer.
I took the above photo at the Rackspace / Codame / Geekdom SF Dataweek afterparty. The photo captures a computer-generated video with parts of the image melting and morphing. I'm the dark suit and white shirt in the middle foreground holding my camera. One aging hippie near Fort Mason maligned me as a "suit" while I walked to the conference center that day and I took it as a compliment. I represent money, knowledge, and style, thank you very much, and that's why hot women gravitate to me and not aging hippies. The Rackspace party reminded me of the articles I read in the late '90s about dot-com startups living wild on VC money in San Francisco's SOMA district. This afterparty was my chance to relive what I missed by not being around for that scene. It looked more like a rave, with a contingent of "club kids" in high-soled shoes and glittery leggings. I noted several of the hot Expo booth babes letting their hair down but I was too busy admiring the tech on display to get their hotel room numbers. Twentysomethings owned the future, in the '90s and today. I'm not in my twenties anymore but I own the future now.
I didn't have time for the entire conference because it's really a code developer's show and I'm Mr. Finance. I could only attend a select few sessions because I was too cheap to pay for anything but an Expo pass. I noticed that many of the paid seminars had no gatekeeper at the door, so anyone could have walked into a paid session. I hope the conference organizers weren't losing money from freeloader coders wandering around Fort Mason Center.
My first free session was an overview of how SQL queries and Java apps running in a Hadoop ecosystem feed Big Data streams into ERP systems. I don't know code but I know a business problem when I see it. Hadoop apps interact with both transactions and analytics, completing the CRM / Big Data / ERP integration that so many IT pros say they want. This leads me to the belief that knowledge management pros must understand Hadoop. There is no other way for them to ensure that the enterprise's business intelligence effort and predictive analytics are available to the C-suite. That's how tools channel data up the decision chain to support strategy.
Hadoop reminds me of Salesforce's approach to offering cloud ERP solutions, except Hadoop solutions are built on demand. Both types of solutions can be scaled down for small enterprises that can't afford big iron computing. My first take-away from DataWeek is that startups doing manual, customized apps or analytic solutions for B2B customers will fail. Data ecosystems like Hadoop are growing too large for anything but machine learning that automates analytics. Only top-layer KM, heuristics for predictive analytics, and corporate strategy should be subject to manual manipulation. The KM focus should be on structural design, with decision criteria that trigger manual intervention.
I patrolled the Expo floor prior to the heavily advertised beer tasting. I was pleasantly surprised to see several attractive women staffing the booths. Disqus gal, you were the best, and thank you for filling out those jeans so well. The women attending were also cute. It's good to see more women pursuing tech careers. They should pursue me too but I understand if they're focused.
I attended a talk from IBM Analytics about the most important factors in data visualization. I started visualizing what the hot blonde woman in the back row would look like at my place but then I remembered I have a blogging job to do. It turns out there are four pillars governing how analysts should publish visual representations of data: purpose (why), content (what), structure (how), formatting (everything else). Knowing the purpose for assembling a presentation lays the foundation for an iterative design checklist.
Purpose for me means knowing what actions I want to prompt in my audience, such as uncontrollable rage at my opinions. Content covers the data and relationships that matter to me and my audience, like IQ comparisons that demonstrate my intellectual superiority to most of humanity. The IBM guy showed a simple bar chart of how Apple's iPhone revenue was greater than all of Microsoft's revenue, so even two data points can show something powerful. Structure governs the meaning of axes and layouts that reveal relationships, like my relationships with numerous female admirers. That would take too much time to graph so I'll just relate IBM's best practices here. Using 3D graphs distorts data and you can't see intersections with axes when the front 3D thingy obscures what's in back. The human brain is better at comparing angles than circles, so charts with long bars on a common baseline are easier to perceive. Horizontal bars showing binary (either/or) breaks in continuous data frees the vertical axis to sort categories by ranking. Finally, formatting data to show what's important accounts for how users will consume the data. Callouts in geodata reveal something that matters. Using color to indicate quantity forces readers to keep glancing at the legend, which is bad. Color also has cultural context; red-/white/blue means something in the US and France. "Redundant encoding" puts the same data into different visual channels, driving the point into viewers' brains in case the format doesn't translate perfectly. Labeling highlights things, so either make it possible to label outliers (if they reveal something significant) or use them to orient viewers when you label axes. IBM's white paper on successful visualization sums up all of this stuff and so does the author's handy diagram. This knowledge makes me think about the graphs I've seen in oil and gas investment presentations. Formatting the wells' decline rates means everything if scale de-emphasizes the steepness of the decline curve. Readers fooled by logarithmic scales may think declines are gradual in shale wells. I'll look for scale the next time some shale energy promoter shows me his projections.
The only other seminar I had time to check out was on how security architectures can be unified across mobile, cloud, the Web, and APIs. Typical APIs aren't exposed to the general public and API security is enterprise-specific. The security landscape is so broad that it open up APIs as a potential portal for intrusion. Enterprises that support tiered access from public users and internal users (like financial service institutions) must support multiple credentials. I think authentication protocols will have to be built into APIs prior to launch, just like analytics. APIs must do much more than run apps. They collect use case data, feed analytics, provide a security barrier, and define the user experience. Integrating all of these things will require more effort from programmers than ever. I'm glad I'm not a programmer.
I took the above photo at the Rackspace / Codame / Geekdom SF Dataweek afterparty. The photo captures a computer-generated video with parts of the image melting and morphing. I'm the dark suit and white shirt in the middle foreground holding my camera. One aging hippie near Fort Mason maligned me as a "suit" while I walked to the conference center that day and I took it as a compliment. I represent money, knowledge, and style, thank you very much, and that's why hot women gravitate to me and not aging hippies. The Rackspace party reminded me of the articles I read in the late '90s about dot-com startups living wild on VC money in San Francisco's SOMA district. This afterparty was my chance to relive what I missed by not being around for that scene. It looked more like a rave, with a contingent of "club kids" in high-soled shoes and glittery leggings. I noted several of the hot Expo booth babes letting their hair down but I was too busy admiring the tech on display to get their hotel room numbers. Twentysomethings owned the future, in the '90s and today. I'm not in my twenties anymore but I own the future now.
Thursday, October 10, 2013
Wednesday, October 09, 2013
Alfidi Capital Attends IPAA OGIS San Francisco 2013
I'm not a member of the Independent Petroleum Association of America but their events have great value for me as a market analyst and commentator. I attender their annual Oil and Gas Investment Symposium (OGIS) San Francisco last week. I'll address each of the presenting companies in future blog articles. This particular article is about concepts that apply to the entire energy sector. The OGIS participants use these ideas frequently. Understanding these ideas enables understanding of a company's value.
First of all, IPAA has some phenomenal statistics available for free. I had previously relied on the Energy Information Administration's data but the IPAA data sets are excellent companion pieces. IPAA also advocates maintaining tax breaks for oil and gas exploration on its Energy Tax Facts site. I'd prefer to eliminate any and all tax breaks for energy exploration because the market needs to price the all-in cost of energy production. I would also eliminate breaks for renewable energy because its costs have pretty much reached grid parity. Eliminating both severance taxes and depletion allowances would make the non-renewable energy sector's project economics more transparent.
Let's talk about hedging for a moment. Lots of hydrocarbon producers like to hedge the price of oil with futures contracts. Exploration and production (E&P) companies in the upstream sector hedge against declines in the price of West Texas Intermediate (WTI) crude because a price drop will hurt their revenue. I can see how operators who have committed free cash flow to a capex program would not want to see their drilling interrupted by commodity price swings. Hedging makes a bit less sense for operators who have committed to a perpetually rising common stock dividend. That kind of corporate policy can hamstring management and set investors up for disappointment if the hedging strategy cannot sufficiently protect earnings. Most E&Ps hedge most of their projected production. Swaps seem to be the most popular instrument but some companies use costless collars. That's my anecdotal impression, anyway.
Energy REITs and MLPs also hedge prices (again, to support their expected dividend) and some of them even hedge interest rates because they borrow to acquire new producing properties. They hedge prices to make their payouts more predictable. Investors have to live with that predilection, but it makes less sense to me than producers who hedge prices. Do E&Ps hedge interest rates as well as prices? They certainly borrow for capex.
I'm agnostic on whether North American oil producers should hedge their production against WTI prices or Brent prices. It may depend on where the companies market their crude. Crude shipments to the Americas are often priced in WTI quotes while production in Asia and the Middle East is priced in Brent. The Brent-WTI spread matters to investment banks, hedge funds, and energy traders whose arbitrageurs play the price differential. Bloomberg has a decent rundown of common energy prices; arbitrage away, hedgies. The CME Group has the most transparent energy derivative prices I could find, including contracts for both WTI and Brent. Futures and other derivatives have enormous risks and I've never used them in my own portfolio. I would rather leave them to energy supermajors who have complex value chains to hedge.
MLPs have it easier than E&Ps. Older wells with long, slow decline curves fit MLPs very well because they need little additional capex other than basic maintenance. That's why MLPs use debt to acquire existing wells rather than putting in capex. I agree with the common MLP claim that low barrel per day (bpd) producing wells are ideal for their structures. I've heard some MLPs describe their avoidance of incentive distribution rights (IDRs) as a selling point to the investing public. I really think MLPs will have a field day buying low-producing shale wells at cheap prices once the Bakken boom fades away.
Some E&P companies tout their natural gas liquids (NGL) production. Investors need to remember that NGLs are more difficult to hedge because they require longer futures contracts (about 12-18 months). A web search for "NGL derivatives" did not reveal any central exchange for them that I could find, but some energy trading firms specialize in constructing private swaps for NGLs. The lack of liquidity for these financial derivatives means NGL swap prices can easily affect real-world NGL prices.
Energy MLPs do have to worry about Unrelated Business Income Tax (UBTI) and they report this on the K-1 form they send to their investors. I had previously thought that holding a high-yielding MLP in a tax-advantaged retirement account would be a smart move until I realized that UBTI may trigger a tax liability. Index funds and ETFs that invest in MLPs do not have this UBTI drawback for an IRA. An MLP that produces zero or negative UBTI poses no apparent problem for an IRA. It pays to know the rules in IRS Pub 598 and it pays to read an MLP's documents. I am not a tax advisor, so don't ask me what to do.
If you're sick of hearing about fracking and horizontal drilling, there's a new drilling technique called "down spacing" coming along. Drillers down space by decreasing the space between wells in an area, which is slightly different from the "pad drilling" concept that erects more than one well on a given land plot. These two approaches fly in the face of one of shale gas's selling points, namely that one drill rig per pad enables the minimum possible surface disturbance. Increasing the rig count on a project also accelerates a field's decline rate. Shale producers need to think hard about how much they can spend on additional engineering to expand recoverable deposits before they go hog wild into down spacing and pad drilling. We're all going to hear a lot more about enhanced oil recovery (EOR) techniques and ways to minimize sub-surface non-productive time (NPT) as more shale plays hit their very steep decline curves.
I don't worry about whether producers have drill-to-earn, produce-to-earn, or shoot-to-earn clauses in their farm-out agreements. Either they produce or they don't. I'm interested in bottom-line results. I don't worry about land value capture because the financing of infrastructure servicing oil/gas fields is less important than whether said fields are economically recoverable. Held by production clauses are good to have if the producer doesn't know how long it will take to bring a greenfield project to maturity.
I'm agnostic as to whether a producer owns a working interest or the entire property; their job is to spend capex on production and someone has to pay the costs of owning wells. I do care about MLPs that focus on royalty interests (especially overriding ones) because that limits their lifetime capex commitment.
Geologists analyze a project's porosity, resistivity, lithology, total organic carbon (TOC), permeability, and isopach subsurface data. I don't look at those things because I'm not a geologist. I'm a finance guy and I need to see financial data. All of the eyewash on soil engineering that energy companies put into their investor relations pitches means nothing if they don't have a budget to turn exploration into production. Geological characteristics will determine the amount of stock tank original oil in place (STOOIP) and its estimated ultimate recovery (EUR).
The EUR of a project deserves a special.discussion. EUR is a mix of oil, gas, and NGLs that is always measured in BOE. Proven reserves includes several engineering terms that do not necessarily comport with financial terms allowed by US securities regulators. Progressing from 1P (proven) to 2P (probable) to 3P (possible) reserves may impress some investors but it does not impress regulators. The SEC has very definite rules for what can and cannot be included in reserves reported in financial statements. This is why producers break down their 1P reserves into proved developed producing (PDP), proved developed non-producing (PDNP), and proved undeveloped (PUD). Using estimates of proven reserves only is the most conservative way to calculate a project's valuation. That's why I read the 43-101 reports of junior resource companies that are registered in Canada. The 43-101 regime allows for "proven and probable" (2P) reserves that I can use to find a valuation.
It's good to know the Baker Hughes US rig count to track the energy sector's health. Producers need to know the day rates of rigs in their region. Analysts track the recycle ratio of an energy company, which the companies themselves often quote as the netback. I have not yet used a recycle ratio in my analysis of energy companies but I will try to apply it in the future. It may even apply to renewable energy companies if it can be measured in kilowatt hours.
I shake my head at shale oil producers who allow their natural gas production to flare off instead of trying to capture it. That is literally money going up in smoke. Producers who care about maximizing ROI on their projects should be willing to spend the capex needed to install temporary pipelines and storage systems that will enable them to capture gas that would otherwise flare off. Orphan gas gets plenty of attention in the midstream sector. Too many shale producers have their eye on the steeply declining production curve and want to get a cash return as quickly as possible. They need to to think more about how capturing extra gas production from a shale play will increase a project's long-term value when it's ready to be sold to an MLP. Don't ask me to figure the difference between wet gas and dry gas; that's a problem for petroleum engineers.
The great thing about reading my blog is that all of the knowledge I gain at conferences and investment seminars is here for free. You people should be entertained by my discussions. I'll take my bow, thank you very much. The next set of IPAA events will give me more opportunities to show off my knowledge.
First of all, IPAA has some phenomenal statistics available for free. I had previously relied on the Energy Information Administration's data but the IPAA data sets are excellent companion pieces. IPAA also advocates maintaining tax breaks for oil and gas exploration on its Energy Tax Facts site. I'd prefer to eliminate any and all tax breaks for energy exploration because the market needs to price the all-in cost of energy production. I would also eliminate breaks for renewable energy because its costs have pretty much reached grid parity. Eliminating both severance taxes and depletion allowances would make the non-renewable energy sector's project economics more transparent.
Let's talk about hedging for a moment. Lots of hydrocarbon producers like to hedge the price of oil with futures contracts. Exploration and production (E&P) companies in the upstream sector hedge against declines in the price of West Texas Intermediate (WTI) crude because a price drop will hurt their revenue. I can see how operators who have committed free cash flow to a capex program would not want to see their drilling interrupted by commodity price swings. Hedging makes a bit less sense for operators who have committed to a perpetually rising common stock dividend. That kind of corporate policy can hamstring management and set investors up for disappointment if the hedging strategy cannot sufficiently protect earnings. Most E&Ps hedge most of their projected production. Swaps seem to be the most popular instrument but some companies use costless collars. That's my anecdotal impression, anyway.
Energy REITs and MLPs also hedge prices (again, to support their expected dividend) and some of them even hedge interest rates because they borrow to acquire new producing properties. They hedge prices to make their payouts more predictable. Investors have to live with that predilection, but it makes less sense to me than producers who hedge prices. Do E&Ps hedge interest rates as well as prices? They certainly borrow for capex.
I'm agnostic on whether North American oil producers should hedge their production against WTI prices or Brent prices. It may depend on where the companies market their crude. Crude shipments to the Americas are often priced in WTI quotes while production in Asia and the Middle East is priced in Brent. The Brent-WTI spread matters to investment banks, hedge funds, and energy traders whose arbitrageurs play the price differential. Bloomberg has a decent rundown of common energy prices; arbitrage away, hedgies. The CME Group has the most transparent energy derivative prices I could find, including contracts for both WTI and Brent. Futures and other derivatives have enormous risks and I've never used them in my own portfolio. I would rather leave them to energy supermajors who have complex value chains to hedge.
MLPs have it easier than E&Ps. Older wells with long, slow decline curves fit MLPs very well because they need little additional capex other than basic maintenance. That's why MLPs use debt to acquire existing wells rather than putting in capex. I agree with the common MLP claim that low barrel per day (bpd) producing wells are ideal for their structures. I've heard some MLPs describe their avoidance of incentive distribution rights (IDRs) as a selling point to the investing public. I really think MLPs will have a field day buying low-producing shale wells at cheap prices once the Bakken boom fades away.
Some E&P companies tout their natural gas liquids (NGL) production. Investors need to remember that NGLs are more difficult to hedge because they require longer futures contracts (about 12-18 months). A web search for "NGL derivatives" did not reveal any central exchange for them that I could find, but some energy trading firms specialize in constructing private swaps for NGLs. The lack of liquidity for these financial derivatives means NGL swap prices can easily affect real-world NGL prices.
Energy MLPs do have to worry about Unrelated Business Income Tax (UBTI) and they report this on the K-1 form they send to their investors. I had previously thought that holding a high-yielding MLP in a tax-advantaged retirement account would be a smart move until I realized that UBTI may trigger a tax liability. Index funds and ETFs that invest in MLPs do not have this UBTI drawback for an IRA. An MLP that produces zero or negative UBTI poses no apparent problem for an IRA. It pays to know the rules in IRS Pub 598 and it pays to read an MLP's documents. I am not a tax advisor, so don't ask me what to do.
If you're sick of hearing about fracking and horizontal drilling, there's a new drilling technique called "down spacing" coming along. Drillers down space by decreasing the space between wells in an area, which is slightly different from the "pad drilling" concept that erects more than one well on a given land plot. These two approaches fly in the face of one of shale gas's selling points, namely that one drill rig per pad enables the minimum possible surface disturbance. Increasing the rig count on a project also accelerates a field's decline rate. Shale producers need to think hard about how much they can spend on additional engineering to expand recoverable deposits before they go hog wild into down spacing and pad drilling. We're all going to hear a lot more about enhanced oil recovery (EOR) techniques and ways to minimize sub-surface non-productive time (NPT) as more shale plays hit their very steep decline curves.
I don't worry about whether producers have drill-to-earn, produce-to-earn, or shoot-to-earn clauses in their farm-out agreements. Either they produce or they don't. I'm interested in bottom-line results. I don't worry about land value capture because the financing of infrastructure servicing oil/gas fields is less important than whether said fields are economically recoverable. Held by production clauses are good to have if the producer doesn't know how long it will take to bring a greenfield project to maturity.
I'm agnostic as to whether a producer owns a working interest or the entire property; their job is to spend capex on production and someone has to pay the costs of owning wells. I do care about MLPs that focus on royalty interests (especially overriding ones) because that limits their lifetime capex commitment.
Geologists analyze a project's porosity, resistivity, lithology, total organic carbon (TOC), permeability, and isopach subsurface data. I don't look at those things because I'm not a geologist. I'm a finance guy and I need to see financial data. All of the eyewash on soil engineering that energy companies put into their investor relations pitches means nothing if they don't have a budget to turn exploration into production. Geological characteristics will determine the amount of stock tank original oil in place (STOOIP) and its estimated ultimate recovery (EUR).
The EUR of a project deserves a special.discussion. EUR is a mix of oil, gas, and NGLs that is always measured in BOE. Proven reserves includes several engineering terms that do not necessarily comport with financial terms allowed by US securities regulators. Progressing from 1P (proven) to 2P (probable) to 3P (possible) reserves may impress some investors but it does not impress regulators. The SEC has very definite rules for what can and cannot be included in reserves reported in financial statements. This is why producers break down their 1P reserves into proved developed producing (PDP), proved developed non-producing (PDNP), and proved undeveloped (PUD). Using estimates of proven reserves only is the most conservative way to calculate a project's valuation. That's why I read the 43-101 reports of junior resource companies that are registered in Canada. The 43-101 regime allows for "proven and probable" (2P) reserves that I can use to find a valuation.
It's good to know the Baker Hughes US rig count to track the energy sector's health. Producers need to know the day rates of rigs in their region. Analysts track the recycle ratio of an energy company, which the companies themselves often quote as the netback. I have not yet used a recycle ratio in my analysis of energy companies but I will try to apply it in the future. It may even apply to renewable energy companies if it can be measured in kilowatt hours.
I shake my head at shale oil producers who allow their natural gas production to flare off instead of trying to capture it. That is literally money going up in smoke. Producers who care about maximizing ROI on their projects should be willing to spend the capex needed to install temporary pipelines and storage systems that will enable them to capture gas that would otherwise flare off. Orphan gas gets plenty of attention in the midstream sector. Too many shale producers have their eye on the steeply declining production curve and want to get a cash return as quickly as possible. They need to to think more about how capturing extra gas production from a shale play will increase a project's long-term value when it's ready to be sold to an MLP. Don't ask me to figure the difference between wet gas and dry gas; that's a problem for petroleum engineers.
The great thing about reading my blog is that all of the knowledge I gain at conferences and investment seminars is here for free. You people should be entertained by my discussions. I'll take my bow, thank you very much. The next set of IPAA events will give me more opportunities to show off my knowledge.
Tuesday, October 08, 2013
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