Strong analysis
Train gifts in fluid foresight
Scenario stats
Train gifts in fluid foresight
Scenario stats
Thursday, August 14, 2014
Tyhee Gold Takes Risk on Sutter to Leverage Into Canada
Tyhee Gold (TDC.V) is a junior gold mining company with a property in Canada that they obviously really like. Their stated strategy is to operate another property that will enable them to "leverage" their way to success with their favored Canadian property. That's a pretty unique approach. Most junior gold companies would try to sell their more attractive property to a major mining company and use the proceeds to move on with other exploration projects.
The Yellowknife gold project in Canada has a completed 43-101 prefeasibility study. The property has 2P reserves at decent grades, although its remote location adds to the cost of transporting mined metal to market. I think their base case IRR assumptions are too optimistic given the low discount rate they apply. I would set the discount rate higher given the financing concerns I will discuss below.
The CEO is a professional mining engineer, and the rest of the team has deep experience in mining. It is always encouraging to see a junior mining company get serious about operating a project by hiring people who have actually operated projects. The company's news feed shows that they have settled on acquiring most of Sutter Mining after their attempted merger with Santa Fe Gold fell through. The financing for Sutter exposes Tyhee to a significant amount of debt and a US$4M cash payment up front, along with another payment of almost CAD$1.2M to acquire much of Sutter's common stock. The details don't include any immediate assumption of new debt, but Tyhee is committing to guarantee Sutter's existing debt payments and raise more financing to operate Sutter's mine.
Examining Tyhee's financial reports illustrates the risk in this transaction. Tyhee had a net loss of almost CAD$1.5M in the second quarter ending May 31, 2014. They had barely CAD$533K in cash on hand, so completing this transaction means they must raise a significant amount of capital. That's tough to do with almost CAD$7.3M in current liabilities. Any high-debt, money-losing company that raises money from equity investments will have to seriously dilute existing shareholders. They may get some breathing room if they can recover the outstanding balance of the bridge loan they granted to Sante Fe Gold (folks, please read the notes in that second quarterly report for 2014).
I will not include Tyhee in my own portfolio. Their high-risk financing of Sutter Mining's existing operations is more difficult than simply selling their Canadian property and moving on to greener pastures.
Full disclosure: No position in Tyhee Gold, or any other company mentioned, at this time.
The Yellowknife gold project in Canada has a completed 43-101 prefeasibility study. The property has 2P reserves at decent grades, although its remote location adds to the cost of transporting mined metal to market. I think their base case IRR assumptions are too optimistic given the low discount rate they apply. I would set the discount rate higher given the financing concerns I will discuss below.
The CEO is a professional mining engineer, and the rest of the team has deep experience in mining. It is always encouraging to see a junior mining company get serious about operating a project by hiring people who have actually operated projects. The company's news feed shows that they have settled on acquiring most of Sutter Mining after their attempted merger with Santa Fe Gold fell through. The financing for Sutter exposes Tyhee to a significant amount of debt and a US$4M cash payment up front, along with another payment of almost CAD$1.2M to acquire much of Sutter's common stock. The details don't include any immediate assumption of new debt, but Tyhee is committing to guarantee Sutter's existing debt payments and raise more financing to operate Sutter's mine.
Examining Tyhee's financial reports illustrates the risk in this transaction. Tyhee had a net loss of almost CAD$1.5M in the second quarter ending May 31, 2014. They had barely CAD$533K in cash on hand, so completing this transaction means they must raise a significant amount of capital. That's tough to do with almost CAD$7.3M in current liabilities. Any high-debt, money-losing company that raises money from equity investments will have to seriously dilute existing shareholders. They may get some breathing room if they can recover the outstanding balance of the bridge loan they granted to Sante Fe Gold (folks, please read the notes in that second quarterly report for 2014).
I will not include Tyhee in my own portfolio. Their high-risk financing of Sutter Mining's existing operations is more difficult than simply selling their Canadian property and moving on to greener pastures.
Full disclosure: No position in Tyhee Gold, or any other company mentioned, at this time.
Wednesday, August 13, 2014
Access Pharmaceuticals Needs Access to Earnings
Access Pharmaceuticals (ACCP) seeks to bring nanopolymers into drug delivery. Introducing polymer nanocomposites (PNCs) theoretically enhances the ability of a drug to interact with the body's natural chemical systems. A small number of polymer-drug conjugates are under development but this pharma sector is still maturing.
The company's MuGard product attempts to treat oral mucositis symptoms in cancer patients. Existing treatments for these symptoms are relatively cheap, including milk of magnesia and bland saline rinses. Those common household treatments are probably not subject to insurance reimbursement if patients can mix them at home. MuGard will have to compete at a very low price point to appeal to over-the-counter buyers. It is not clear to me whether a nanoengineered drug is cheaper than a saline solution. If MuGard can't compete on price, it needs to be a heck of a lot more effective than benzocaine, kaopectate, benzydamine, and other such compounds that aren't homemade. They do have other drugs in the pipeline, so MuGard isn't their only bet.
The Access management team has one person with clear experience in the pharma sector. It is not clear from their bios whether any of them have experience taking a small drug company from inception through trials to full FDA-approved marketability. Prior entrepreneurial experience in a team is a risk-reduction mechanism that too many small drug companies ignore. Investors need to see the full story of how a team succeeded in similar ventures.
Examining financial statements shows us how well a company executes its business plan. Read their 10-Q dated May 12, 2014. Their cash on hand was just under $300K, and with a net loss of almost $1.6M in that quarter they will have to continue to raise significant amounts of money just to keep the lights on. They will need at least $10M this year to pay their current liabilities; that's tough to raise with little or no revenue. Raising it through equity means further dilution for existing shareholders. That would be a tough pill to swallow with the share price currently under one dollar.
The ticker symbol Access uses has a trading history back to 1980, according to Yahoo Finance. Anyone who would have invested in this ticker prior to about January 2014 would have seen their stake get clobbered by now. I do not invest in companies with unclear product pricing advantages, minimal revenues, and looming liabilities. Access Pharmaceuticals will not have access to my portfolio.
Full disclosure: No position in ACCP at this time.
The company's MuGard product attempts to treat oral mucositis symptoms in cancer patients. Existing treatments for these symptoms are relatively cheap, including milk of magnesia and bland saline rinses. Those common household treatments are probably not subject to insurance reimbursement if patients can mix them at home. MuGard will have to compete at a very low price point to appeal to over-the-counter buyers. It is not clear to me whether a nanoengineered drug is cheaper than a saline solution. If MuGard can't compete on price, it needs to be a heck of a lot more effective than benzocaine, kaopectate, benzydamine, and other such compounds that aren't homemade. They do have other drugs in the pipeline, so MuGard isn't their only bet.
The Access management team has one person with clear experience in the pharma sector. It is not clear from their bios whether any of them have experience taking a small drug company from inception through trials to full FDA-approved marketability. Prior entrepreneurial experience in a team is a risk-reduction mechanism that too many small drug companies ignore. Investors need to see the full story of how a team succeeded in similar ventures.
Examining financial statements shows us how well a company executes its business plan. Read their 10-Q dated May 12, 2014. Their cash on hand was just under $300K, and with a net loss of almost $1.6M in that quarter they will have to continue to raise significant amounts of money just to keep the lights on. They will need at least $10M this year to pay their current liabilities; that's tough to raise with little or no revenue. Raising it through equity means further dilution for existing shareholders. That would be a tough pill to swallow with the share price currently under one dollar.
The ticker symbol Access uses has a trading history back to 1980, according to Yahoo Finance. Anyone who would have invested in this ticker prior to about January 2014 would have seen their stake get clobbered by now. I do not invest in companies with unclear product pricing advantages, minimal revenues, and looming liabilities. Access Pharmaceuticals will not have access to my portfolio.
Full disclosure: No position in ACCP at this time.
Tuesday, August 12, 2014
Viggle Needs Income to Make Its Share Price Jiggle
Viggle (VGGL) is one of those small online companies crying out for attention. I'll be generous and give them some. Their main properties are an entertainment rewards platform, a content sharing platform, and an audience analytics suite. My Google searches of those terms reveal that none of Viggle's brands are on the first page of search results. That must be discouraging for these folks. Viggle's app partnership with DirecTV counts as a good user engagement method but I don't see what would prevent DirecTV from tweaking its own apps to capture Viggle's rewards traffic.
The Viggle team is extremely large for an app developer. Consider that successful app companies in Silicon Valley have a handful of employees. Their financial statements should indicate whether all of these people add value. The 8-K dated June 25, 2014 reveals a merger with Choose Digital that cost Viggle almost 2M shares (a significant dilution) and created a contingent payment of almost $4.8M, payable in about a year. That wouldn't be such a bad hole to crawl out of if Viggle had sufficient net earnings to pay it off. Unfortunately, the 10-Q for May 14, 2014 shows Viggle is not profitable. They had about $1.4M in cash on hand back in March but lost almost -$14M for that quarter. That burn rate puts them at going concern risk on a weekly basis. Check out their SGA of $18.8M; that's what that huge team displayed on their website costs. Silicon Valley VCs get sticker shock when they fund a company that blows through its investment hiring unneeded people before their sales justify expansion.
Viggle is a good case study showing that user engagement stats and lots of app store downloads don't necessarily translate into revenue. The history of this company as entities named Function (X) and Gateway Industries escapes me, but it's irrelevant. This one really reminds me of Inuvo, another Web portal I evaluated today. Only so many online rewards marketplaces will ultimately prove viable; the rest will end up selling to each other in a frenzy of blowout, self-cannibalizing referrals. I've given Viggle more attention than it deserves. It will get more attention if it cuts its burn rate and becomes profitable.
Full disclosure: No position in VGGL at this time.
The Viggle team is extremely large for an app developer. Consider that successful app companies in Silicon Valley have a handful of employees. Their financial statements should indicate whether all of these people add value. The 8-K dated June 25, 2014 reveals a merger with Choose Digital that cost Viggle almost 2M shares (a significant dilution) and created a contingent payment of almost $4.8M, payable in about a year. That wouldn't be such a bad hole to crawl out of if Viggle had sufficient net earnings to pay it off. Unfortunately, the 10-Q for May 14, 2014 shows Viggle is not profitable. They had about $1.4M in cash on hand back in March but lost almost -$14M for that quarter. That burn rate puts them at going concern risk on a weekly basis. Check out their SGA of $18.8M; that's what that huge team displayed on their website costs. Silicon Valley VCs get sticker shock when they fund a company that blows through its investment hiring unneeded people before their sales justify expansion.
Viggle is a good case study showing that user engagement stats and lots of app store downloads don't necessarily translate into revenue. The history of this company as entities named Function (X) and Gateway Industries escapes me, but it's irrelevant. This one really reminds me of Inuvo, another Web portal I evaluated today. Only so many online rewards marketplaces will ultimately prove viable; the rest will end up selling to each other in a frenzy of blowout, self-cannibalizing referrals. I've given Viggle more attention than it deserves. It will get more attention if it cuts its burn rate and becomes profitable.
Full disclosure: No position in VGGL at this time.
Inuvo Tries to Compete With Big Ad Players
The increasing confluence of RTB and SSP in online ad networks means small players have to do both equally well. Competing with Google in the ad server segment requires nothing less. Inuvo (INUV) is one challenger delivering targeted ads. Considering their results is worth a few minutes of my time.
The company's website currently showcases three different functions: ValidClick, Alot, and their own proprietary platform. ValidClick is supposed to be an ad server of some sort. Using search PPC as the core of an ad server works for Google because it dominates search. The same strategy for an ad server not tied to a major search engine is kind of silly. Alot is supposed to be a mix of content and apps, but its layout reminds me of how Yahoo and AOL try to be all things to all segments. That strategy works with a web property already known to millions of visitors. It is not a smart thing for an upstart to do without the advantage of some very special secret weapon (like the algorithm Google used to overtake Yahoo in search dominance). The Inuvo proprietary platform doesn't display an ecosystem of publishers, or library of apps, or a search function, or anything else that would lead me to believe there's a lot going on here. I have no idea what makes the platform compelling.
I always read the fine print of financial statements. Read their 10-Q quarterly filing for July 31, 2014. They operate in Arkansas thanks to a state grant that mandates how many employed positions they must fill at specified compensation, regardless of whether they are financially successful. Revenue must precede the build-out of infrastructure in a small enterprise. The good news is that they are profitable, but I wonder how much more successful they would be if they could automate away some of those paid positions. The bad news is that their profit margin is barely over 3%. Most healthy companies have a much higher figure.
The stock trades at around a buck right now but was significantly higher from roughly 2004 to 2008. I wonder what the heck they did way back then. I'm not sufficiently intrigued by this company to go back and look because it's been trading in penny territory for the past few months. What a company does today is more important than what it did a decade ago. The online ad business is Google's plaything and upstarts need something really special to stand out. Inuvo doesn't look special enough to deserve a place in my portfolio.
Full disclosure: No position in INUV at this time.
The company's website currently showcases three different functions: ValidClick, Alot, and their own proprietary platform. ValidClick is supposed to be an ad server of some sort. Using search PPC as the core of an ad server works for Google because it dominates search. The same strategy for an ad server not tied to a major search engine is kind of silly. Alot is supposed to be a mix of content and apps, but its layout reminds me of how Yahoo and AOL try to be all things to all segments. That strategy works with a web property already known to millions of visitors. It is not a smart thing for an upstart to do without the advantage of some very special secret weapon (like the algorithm Google used to overtake Yahoo in search dominance). The Inuvo proprietary platform doesn't display an ecosystem of publishers, or library of apps, or a search function, or anything else that would lead me to believe there's a lot going on here. I have no idea what makes the platform compelling.
I always read the fine print of financial statements. Read their 10-Q quarterly filing for July 31, 2014. They operate in Arkansas thanks to a state grant that mandates how many employed positions they must fill at specified compensation, regardless of whether they are financially successful. Revenue must precede the build-out of infrastructure in a small enterprise. The good news is that they are profitable, but I wonder how much more successful they would be if they could automate away some of those paid positions. The bad news is that their profit margin is barely over 3%. Most healthy companies have a much higher figure.
The stock trades at around a buck right now but was significantly higher from roughly 2004 to 2008. I wonder what the heck they did way back then. I'm not sufficiently intrigued by this company to go back and look because it's been trading in penny territory for the past few months. What a company does today is more important than what it did a decade ago. The online ad business is Google's plaything and upstarts need something really special to stand out. Inuvo doesn't look special enough to deserve a place in my portfolio.
Full disclosure: No position in INUV at this time.
Monday, August 11, 2014
The Haiku of Finance for 08/11/14
Interview pain point
Find out customer's problem
Show them solution
Find out customer's problem
Show them solution
Pain Points in the Semiconductor and Solar Sectors
I mentioned in my report from Intersolar / SEMICON 2014 that the semiconductor and solar sectors have some unmapped pain points. I took it upon myself to identify those pain points in brief CustDev interviews with vendors on the expo floors. I was not there to sell them anything, so I had more credibility than a vendor. That's how I obtained the insights I'll share below.
I'll start with the semiconductor ecosystem. The SEMICON exhibitors were all kinds of trinket makers that large semiconductor manufacturers would find in their supply chains. The most frequently mentioned pain point for them was production cost. Equipment makers don't always know what drives the cost of producing a complex product, which in turn determines price. They don't even know if the problems reside in their designs or their supply chains, even after analysis. Longer lead times add costs and customers don't always forecast their needs very well.
Other pain points in semiconductors seem to be hostage to production costs. Addressing marketing channels is complicated by tight resources (making it difficult to address a changing market segment) and the difficulty of getting product release information into the hands of the appropriate technical audiences with purchasing authority. One frequently mentioned pain point was the gripe that human resources were a recurring irritant. Hiring the right people was always difficult and many of the company leaders I interviewed said "people cause problems." They never said what kind of problems; I suspect those problems are really from lack of knowledge about how to solve marketing and production problems.
I have concluded that the relationship between production costs and marketing costs is a strong source of pain for the upstream parts of the semiconductor sector. The mismatch between market knowledge and the ability to adjust capacity is costing the sector money. This is an underexplored area that is fertile ground for solutions in codifying manufacturing knowledge, material costs, and business process maps. I believe that startups can deliver disruption in this market by deploying enterprise Big Data analytics solutions addressing those knowledge gaps. There is money to be made in solving manufacturing problems.
I'll continue with the solar sector. Three very different pain points emerged under the broad topics of regulation, project knowledge, and financing. Regulation poses unexpected problems for installers unfamiliar with local fire codes or national safety regulations. This is particularly costly for inverters that must manage fault detections and shutdowns.
Project knowledge is a challenge for solar installers. Project developers often ignore monitoring until the end of a sales cycle, and this is not weighted in system design until after funds are spent. Each solar project is unique to a specific architecture and geography. Developers stumble when they ignore the costs of grid access where transmission lines are inadequate. I had a hard time believing some solar component manufacturers have difficulty sourcing basic materials like steel and silicon, so perhaps I spoke to at least one operator who was incompetent.
One very knowledgeable solar person made my day by addressing the cost of a typical installation. Soft costs are a big factor in residential PV. The expected lifetime of durable modules in commercial PV are still too much of an unknown. These random costs make the perfect segue from project knowledge to financing, because uncertainty in estimating project cost means financing must be flexible. The ease of obtaining customer financing would sell more solar PV systems.
I have concluded that the challenges facing the solar sector are more diverse than those facing the semiconductor sector. Entrepreneurs can't solve the regulatory pain point, but utilities may be an untapped source of support in pushing reform. There may be a market for apps that help installers navigate local, state, and national regulatory mazes. DOE has made strides in reducing soft costs and making project planning more transparent. Solving the project knowledge pain point is an open field for startups developing Hadoop-based knowledge sharing architectures. Finally, the financing pain point has a plethora of solutions at the federal and state level but consumers may not know about all of the tax incentives they can use. Yield cos and tax equity are financial solutions for commercial projects but offer little relief for single-unit residential installation. Once again, apps may help the real estate sector arrange financing for home improvements that incorporate solar, wind, and storage installations as home improvements.
I only had time to hit up a few dozen vendors so my impressions are not as robust as what a startup would need for an actionable marketing plan. Oh yeah, the funniest part of my CustDev exploration was when I asked one SEMICON guy to name his biggest pain point. He rolled his eyes and said, "People like YOU!" I knew when to back off but I was not deterred from gathering anecdotes. I make it my mission to understand how to make money from disruption. Someday a startup will catch my eye because it can solve the problems I identified here in bold type. I'll be ready to commit my knowledge as sweat equity.
I'll start with the semiconductor ecosystem. The SEMICON exhibitors were all kinds of trinket makers that large semiconductor manufacturers would find in their supply chains. The most frequently mentioned pain point for them was production cost. Equipment makers don't always know what drives the cost of producing a complex product, which in turn determines price. They don't even know if the problems reside in their designs or their supply chains, even after analysis. Longer lead times add costs and customers don't always forecast their needs very well.
Other pain points in semiconductors seem to be hostage to production costs. Addressing marketing channels is complicated by tight resources (making it difficult to address a changing market segment) and the difficulty of getting product release information into the hands of the appropriate technical audiences with purchasing authority. One frequently mentioned pain point was the gripe that human resources were a recurring irritant. Hiring the right people was always difficult and many of the company leaders I interviewed said "people cause problems." They never said what kind of problems; I suspect those problems are really from lack of knowledge about how to solve marketing and production problems.
I have concluded that the relationship between production costs and marketing costs is a strong source of pain for the upstream parts of the semiconductor sector. The mismatch between market knowledge and the ability to adjust capacity is costing the sector money. This is an underexplored area that is fertile ground for solutions in codifying manufacturing knowledge, material costs, and business process maps. I believe that startups can deliver disruption in this market by deploying enterprise Big Data analytics solutions addressing those knowledge gaps. There is money to be made in solving manufacturing problems.
I'll continue with the solar sector. Three very different pain points emerged under the broad topics of regulation, project knowledge, and financing. Regulation poses unexpected problems for installers unfamiliar with local fire codes or national safety regulations. This is particularly costly for inverters that must manage fault detections and shutdowns.
Project knowledge is a challenge for solar installers. Project developers often ignore monitoring until the end of a sales cycle, and this is not weighted in system design until after funds are spent. Each solar project is unique to a specific architecture and geography. Developers stumble when they ignore the costs of grid access where transmission lines are inadequate. I had a hard time believing some solar component manufacturers have difficulty sourcing basic materials like steel and silicon, so perhaps I spoke to at least one operator who was incompetent.
One very knowledgeable solar person made my day by addressing the cost of a typical installation. Soft costs are a big factor in residential PV. The expected lifetime of durable modules in commercial PV are still too much of an unknown. These random costs make the perfect segue from project knowledge to financing, because uncertainty in estimating project cost means financing must be flexible. The ease of obtaining customer financing would sell more solar PV systems.
I have concluded that the challenges facing the solar sector are more diverse than those facing the semiconductor sector. Entrepreneurs can't solve the regulatory pain point, but utilities may be an untapped source of support in pushing reform. There may be a market for apps that help installers navigate local, state, and national regulatory mazes. DOE has made strides in reducing soft costs and making project planning more transparent. Solving the project knowledge pain point is an open field for startups developing Hadoop-based knowledge sharing architectures. Finally, the financing pain point has a plethora of solutions at the federal and state level but consumers may not know about all of the tax incentives they can use. Yield cos and tax equity are financial solutions for commercial projects but offer little relief for single-unit residential installation. Once again, apps may help the real estate sector arrange financing for home improvements that incorporate solar, wind, and storage installations as home improvements.
I only had time to hit up a few dozen vendors so my impressions are not as robust as what a startup would need for an actionable marketing plan. Oh yeah, the funniest part of my CustDev exploration was when I asked one SEMICON guy to name his biggest pain point. He rolled his eyes and said, "People like YOU!" I knew when to back off but I was not deterred from gathering anecdotes. I make it my mission to understand how to make money from disruption. Someday a startup will catch my eye because it can solve the problems I identified here in bold type. I'll be ready to commit my knowledge as sweat equity.
Financial Sarcasm Roundup for 08/11/14
I have yet to find a financial expert on the Internet who is more sarcastic than me. David Stockman's Contra Corner comes pretty close but he doesn't do haiku.
Russia thinks it can win a sanctions war against the West. America sends a paltry amount of exports to Russia but Russia imports a huge portion of its food. The Russkies will be hard pressed to find substitute exporters in Asia and Africa, unless of course they want to eat boatloads of rice. The good news is that fewer Russians will get drunk on vodka if they have to eat their potato crops instead of ferment them.
Europe doesn't like US high yield bonds anymore. The phrase "impending selloff" is really cute. That is exactly what triggered pricing chaos in the financial markets back in August 2007 as an early warning that fixed income securities were mispriced and illiquid. A whole bunch of shaky US companies are going to watch their cash reserves dwindle as investors turn down their junk bonds. stock prices. Watch out below.
China's moderate inflation stats got the West's attention. The West ignores the low quality of China's source data, focusing on headline numbers. Wall Street still does not comprehend the extent of fictionalization in Chinese economic statistics. Even surveys of economic activity from private media outlets are suspect. "Forget it, Jake, it's Chinatown."
The US Treasury is reconsidering its view of MLPs. The Kinder Morgan restructuring may be a prescient move to get out ahead of any future regulatory rollbacks. America's tolerance for proliferating tax shelters is reaching an apotheosis. It was fun while it lasted but Uncle Sam needs to broaden the tax base in ways that don't frighten major donors. Word will eventually trickle out to upper middle class tax donkeys through their tax accountants.
The best item above is the high yield debt warning from Europe. I will be overjoyed to watch a whole bunch of yield-chasing hedge funds implode when they can't sell their synthetic securities. Bring it on.
Russia thinks it can win a sanctions war against the West. America sends a paltry amount of exports to Russia but Russia imports a huge portion of its food. The Russkies will be hard pressed to find substitute exporters in Asia and Africa, unless of course they want to eat boatloads of rice. The good news is that fewer Russians will get drunk on vodka if they have to eat their potato crops instead of ferment them.
Europe doesn't like US high yield bonds anymore. The phrase "impending selloff" is really cute. That is exactly what triggered pricing chaos in the financial markets back in August 2007 as an early warning that fixed income securities were mispriced and illiquid. A whole bunch of shaky US companies are going to watch their cash reserves dwindle as investors turn down their junk bonds. stock prices. Watch out below.
China's moderate inflation stats got the West's attention. The West ignores the low quality of China's source data, focusing on headline numbers. Wall Street still does not comprehend the extent of fictionalization in Chinese economic statistics. Even surveys of economic activity from private media outlets are suspect. "Forget it, Jake, it's Chinatown."
The US Treasury is reconsidering its view of MLPs. The Kinder Morgan restructuring may be a prescient move to get out ahead of any future regulatory rollbacks. America's tolerance for proliferating tax shelters is reaching an apotheosis. It was fun while it lasted but Uncle Sam needs to broaden the tax base in ways that don't frighten major donors. Word will eventually trickle out to upper middle class tax donkeys through their tax accountants.
The best item above is the high yield debt warning from Europe. I will be overjoyed to watch a whole bunch of yield-chasing hedge funds implode when they can't sell their synthetic securities. Bring it on.
Sunday, August 10, 2014
The Limerick of Finance for 08/10/14
Job one of a startup is sales
Don't focus on whether it scales
Without revenue
All bills will come due
No one wants a startup that fails
Don't focus on whether it scales
Without revenue
All bills will come due
No one wants a startup that fails
Meditations on Early Investor Expectations for Startups
I moderated a recent Angel Launch panel at Founders Space where some early stage investors shared their expectations with attentive entrepreneurs. This San Francisco event was very well-attended. The investors' wisdom was a fresh reminder that I always have something to learn. I'll share some of what they revealed below, commingled with my own thinking.
Startup founders need to implement good financial and legal controls at the very inception of their business. Getting good advisers helps avoid common problems. Setting up legal structures, bank accounts, and accounting software is the necessary first order of corporate housekeeping. The founders must delineate their ownership stakes with term sheets that feed the initial cap tables. I've blogged before about how attorneys sometimes deal with "phantom founders" in later stages whose rewards were not clear at the beginning.
Experienced early-stage investors will set expectations for bottom-line results. The team's goals for closing sales get a boost if they land a big-name customer. Leveraging a corporate VC's brand name and ecosystem are important; some other gurus at one of the many conferences I've attended call this "hacking your pedigree." Raising capital is not success, but too many startup CEOs think raising capital is their primary job. Sales revenue from customers is real success, and CEOs need to think of revenue as a non-dilutive capital injection.
I keep hearing about the importance of scaling from investors and entrepreneurs who succeeded. Scaling matters only after a startup proves it has something customers want to buy. Once the early adopters are in the pipeline, the total addressable market (TAM) they represent must be big enough to allow scaling. Making the early customers happy is more important than worrying about scaling too early. Startups can tweak their approaches to marketing channels later if they stay flexible. Startups rarely fail for lack of scaling, because revenue from sales drives the enterprise's ability to scale. I totally see how startups with unsound business models fail by scaling too early; they burn their capital on unneeded physical plant and IT infrastructure before they can pivot to a market segment that allows for revenue-based scaling.
Founders should expect decent terms from early investors but understand that investors must apply a high discount rate. The founders who can protect their interests with liquidation preferences should expect investors to be just as sophisticated. Founders should expect friend / family / fool (FFF) investors to subscribe to warrants, just like later investors.
Serious investors must perform due diligence before committing to invest in a startup. A small team of young people running a brand new company is the easiest to check. They probably have very few legal or financial troubles that will pop up in a background search. Top VC firms often hire private investigators to evaluate a startup team's background before committing millions of dollars in capital. My own preference is to use the basic online search tools available to anyone, plus some pattern recognition techniques common in military intelligence training. Running several Google searches on permutations of someone's name usually yields enough data points to vector their professional experience. San Francisco Superior Court and other regional courts have case histories that anyone can look up free of charge.
Every early investor has their own set of deal-breakers that will stop an investment decision. The most important red flag for me is a lack of personal integrity. I try to give people the benefit of the doubt at first contact. Once I discover inconsistencies in the story someone gives me, they are gone from my professional life with no explanation necessary. I tell people not to ever lie to me. The people who don't listen don't deserve to have me around. I can forgive an entrepreneur who has been through bankruptcy, especially if it resulted from a previous startup. Entrepreneurs are expected to be fully committed to their dream and they do suffer financial penalties when dreams end in business failure. I can understand a divorce settlement and child custody payments, because humans aren't perfect. Sometimes people who possess bold, risk-seeking business personalities leave messy personal lives in their wakes. The deal-breaker for me (besides lack of honesty) in personal affairs is a chain of unrelated bankruptcies, liens, divorces, and other financial train wrecks that recur for years. A business person so immature and reckless needs to sort out their personality problems first before soliciting risk capital.
Subsequent rounds of investment do change the relationship between founders and early investors. The preferred order for expanding a capital structure is sales (first and foremost!), FFF, non-dilutive grants, crowdfunders, angels, and finally VCs. The FFF and grant rounds are somewhat blended in a startup's chaotic early days. Subsequent rounds are more complex and dilute early investors as the enterprise issues new shares. Early investors are often pushed aside in those startups lucky enough to attract huge VC commitments, and they may even be forgotten after forced management changes. The earliest backers need to store their original term sheets securely (yeah, no-brainer, but no one wants to be the FFF who lost their term sheet prior to a billion-dollar IPO). The startup's attorneys are supposed to maintain the cap table proving early ownership but startups do change law firms sometimes. The records transfer may not always be perfect. Perhaps you can tell that I don't completely trust third parties to keep my best interests in mind.
My regular readers know that I see the social / mobile / Big Data investing trend cooling off. The smartphone market in developed countries is at or near its saturation point. The next hot trends in wearables, IoT, and hardware are already visible but I believe early investors will be shell-shocked when they see the price tags for investment. Hardware success stories need a lot more capital than software stories. The elegant solution is early sales of simple beta products, but of course nothing is ever so simple. I would like to see enterprise solutions address the performance gaps in supply chains. Large VCs look down at such solutions because they don't scale to multiple billions of software sales, but I say they can provide startups with enough capital to help pioneer cheaper hardware as IT/OT integration takes off. Startups aiming for base hits will take momentum from those seeking home runs in the next few years. You heard it here first.
Startups deserve to inhabit healthy ecosystems. I blogged about The Rainforest: The Secret to Building the Next Silicon Valley when I discussed my experience at this year's Cleantech Open National Academy. Entrepreneurs operating a virtual enterprise in software can stay lean and code from anywhere. They have fewer concerns than a hardware startup that must weigh physical distance to markets, length of supply chains, and sources for technology collaboration. Colocation with a major research lab may matter in the early days. Locating in a HUBZone may be relevant to startups targeting the government market or the supplier diversity programs of major government contractors. Tax incentives matter once a startup has enough revenue to scale up its capacity; this may dictate a change in location. San Francisco loves giving tax breaks to big tech companies that promise to bring in lots of new jobs. Civic leaders who are serious about following suit in other towns need to follow the Rainforest blueprint. The City By The Bay never gave me any tax breaks for creating my own job with Alfidi Capital, but I can't complain.
None of these meditations mean jack squat without action. Entrepreneurs can will themselves to success if they move forward daily.
None of these meditations mean jack squat without action. Entrepreneurs can will themselves to success if they move forward daily.
Saturday, August 09, 2014
Friday, August 08, 2014
Alfidi Capital at AlwaysOn Silicon Valley Innovation Summit 2014
I attended the AlwaysOn Silicon Valley Innovation Summit (SVIS) last week for the first time. This conference has a long tradition of sorting through the most promising startups in multiple hot tech sectors. My first taste of the show was the pre-opening social event, where remote operators entertained us with their mobile screen avatars. That's what Silicon Valley types do for fun. You can see one in action below.
I spent the next two days at the Computer History Museum receiving the wisdom of the Valley's all-stars. Tony Perkins has been tracking tech trends since the 1990s dot-com boom when he launched Upside and Red Herring. I still have a couple of hard copies of those mags in my archives. I also have hard proof that I attended the show, in my typical name badge photo. The bolded comments are my original action items, for any of you enterprise folks who are need a clue.
Satjiv Chahil let us all know that the world is not flat after all, as Thomas Friedman once wanted us to believe. His work with the American India Foundation develops the digital and physical infrastructure of rural India. The foundation uses street theater to advertise their developments in India in a native twist on Silicon Valley's guerrilla marketing styles. Satjiv advised innovators to think of the cost structures in the rest of the world. I think I know how that applies . . . cheap labor is everywhere but immature infrastructure complicates product delivery.
The discussion of new opportunities in data analytics covered the the changing real-time information that data fusion culls from formerly static sources. I agree that data users are starved for real-time info and I believe the proliferation of APIs allowing data manipulation is just getting started. I was not surprised to hear them say "Chief Data Officer" and "Chief Analytics Officer" are emerging enterprise titles. I suspect that the CDO/CAO should work with the CKO under the COO, not the CIO, which would cement BI as a KM function. Follow the acronyms to victory. These guys got me thinking about KPIs, which tends to happen when I hear something thought-provoking. IMHO those verticals that are the fastest adopters of real-time KPIs will be those that must integrate the most data streams. The sheer number of discrete data streams flowing into an enterprise will drive analytics solutions, rather than gross data volume.
The venture capital outlook for 2014 implied that current tech funding is a boom and not a bubble. I was stunned that most of the audience (82%) in the live poll thought startup valuations were not in a bubble. Come on, people, the Fed's ZIRP stimulus has made everything a bubble by driving normally risk-averse investors to seek yield in riskier assets. I would hate to be in some VC's shoes in a couple of years when they have to explain their cratering venture funds to institutional investors. Anyway, I appreciated the panel's assessment that the amount of capital needed to start a tech company is at a record low, but scaling it up requires a record high amount. High-valuation exits in some verticals like social media are easier because they're cheaper to scale. I did not know that the M&A market in tech is twice as big as the IPO market, mainly because big tech companies like to grow with acquisitions. These VCs are among the few I've heard who admit that the crowdfunding movement is on fire. I can't wait to see the crowdfunding portals with the largest numbers of accredited investors get acquired by brokerages.
Online education is at some inflection point, according to the next set of experts. MOOCs that assemble distributed content in playlists will resemble online music stores. The challenge to universities is clear, but I believe the panelists' expected shakeout of failing colleges will be delayed as long as low interest rates keep student loans widely available. Bad models can survive longer than they should even with poor content, but I agree with the panelists who expect distributed content to reign. They introduced the term "knowledge portfolios" defining the marketable skill sets people will port from more scalable education models. I see a role for the US Department of Education in helping to accredit MOOCs and develop universal standards that make their content portable, once said Department loses its rationale for funding soon-to-be-gone campuses. I see their optimism for course offerings favoring entry-level job skills with an immediate ROI, and I'll raise them the next step in educational innovation: disrupting state-run K-12 schools.
The "top company presentations" were actually pretty compelling at SVIS. A lot of such pitches at conferences leave me with little hope that entrepreneurs have a clue. That was not the case at SVIS. I'll offer up a few random observations as blind items, since much of what the presenters offered was proprietary. APIs allowing data collection and aggregation should be monetizable, especially since they show promise in replacing advertising servers and accelerating lead generation. Data-source agnostic computing is great but it must allow for virtualization, and virtualization in turn can solve a lot of cloud collaboration problems. Exchanging consumer rewards points on exchanges makes me think arbitrage will be possible. One app doing both visual messaging and photo sharing is not an elegant solution because those are two very different functions. I am very impressed with automated analytics that deploy results using visualization tools, because it's perfect for Peter Principle middle managers who would otherwise have to hire expensive outside consultants just to understand their own data.
Tony Perkins probed the CircleUp guy for crowdfunding insights. They discussed the higher IRR for consumer retail startups, which IMHO is counterintuitive given the earlier panel's observation that scaling up is costlier than ever. I would like to see consumer product startups address obvious gaps like urban "food deserts" underserved by grocery stores. I get CircleUp's model of charging startups a commission and taking part in their warrants, and I think other portals can tweak this by adding revenue streams from investors who participate in a raise.
Jay Samit gave a brilliant lunchtime keynote on decoding disruption. His mantra for cannibalizing one's business in favor of disruptive product development would be lost on Microsoft and other big firms notorious for product managers defending their turf. I was one of the audience members who chuckled when he sketched out the post-literate world's penchant for communicating with images. Wait until the images have embedded geodata, Jay, when they'll be more data-dense than ever. Jay thinks smart shoes are on the horizon because walking recharges batteries, and Apple does have a patent for shoe sensors. I will spend the next year or so examining tech startups through his social / location / mobile lens, which will probably bring me back to the geodata hint I dropped above.
Tony Perkins followed Jay's act with his own keynote. Alvin Toffler's "infobesity" means saving steps in what people already do will build billion-dollar companies. Got it, Tony, and lots of people working at Facebook agree with you. He pitched the AlwaysOn model connecting its subscribers to emerging trends, and it sure worked because, hey, I attended, and I'm "always on" hot trends. I like their crowdfunding platform concept . . . but I'm pretty sure they'll have to register it as a broker dealer given emerging SEC and FINRA rules. This will challenge their ownership structure and I'm not sufficiently knowledgeable of securities law to say whether this portal should be a separate entity. The business profiles they plan to publish for clients strongly resemble IPO "tombstone" ads, which are traditionally in the SEC's lane. I'm pretty sure they can iron out the legalese to fulfill Tony's vision of disintermediating venture investing from the human gatekeepers on Sand Hill Road.
The Big Data panel enlightened me on how in-memory computing is a huge leap ahead in database order processing by creating a new layer in the software stack. They admit that selling enterprise-level Big Data deployments is a challenge. I knew that from several previous conferences. It's a challenge because the solutions are pretty much the same price regardless of seat counts, which means the price doesn't scale along with the tech. The panel thought that opportunities also come from layering apps and and blending data science with business domain knowledge. I already knew that too, thanks to my attendance at Decision CAMP 2013, and you'll know it too once you read my blog article on that event. I say the KM / DM / BRMS confluence is still the ultimate Big Data opportunity. Cloudonomics calculations will validate the ROI of cost savings from business process improvements. The panel wants business analytics to replicate VCs' pattern recognition abilities to help identify winning business models. There's already plenty of historic data on startup failure for them to aggregate from the NVCA, National Science Foundation, and other sources. I must disagree with one panelist who said privacy concerns will be a future trend. I believe that people don't care as much about privacy as they say they do. The whole concept is an anomaly of the first two Industrial Revolutions and it will not survive much longer as Big Data erases anonymity.
The social enterprise panel reveled the audience's displeasure with the amount of time spent communications tech. One consensus point was that enterprise power users are in non-techie business domain functions who prefer simple tools. I'm pretty sure the growth curve in social enterprise solutions will slow if business domains can't prove these things generate results. Corporate treasuries aren't unlimited, people. Where are the CKOs and COOs in all this? Are they ever going to figure out that crafting enterprise KPIs is their job? I know it's hard in fragmented organizations but it's worth the effort to grab project leaders and shake out their team-level KPIs.
Bill Gurley demonstrated his genius in his fireside chat on the instant economy with Tony Perkins. His take down of the dot-com stock analysis algorithim was brilliant. No one should assume an implied CAGR over 100% for several years running. He also thinks it's a mistake to assume future bubble peaks will asymptotically match some previous bubble peak. Yeah, this bubble peak has already surpassed the previous several. The good news is that corporate VCs are the dumb money in the room, timing their investments poorly and ramping their buys prior to market highs. I'll be sure and tell any startups I meet to pitch to corporate VCs in the best of times. I learned from Bill that long-term, high square foot leases were a major reason for startup bankruptcies and recapitalizations in the 1990s dot-com bubble! Wow. That means the commercial real estate sector's health in major tech corridors is a pretty good leading indicator for tech bubbles. I now feel sorry for anyone working at a VC-backed tech startup with its own gourmet food court; those luxury amenities add unneeded costs to their leases. Here's a classic Gurley line: Discounting long term risk makes us comfortable, "like a boiling frog." Awesome! Imagine it spoken with the remnant of Bill's original Texas accent. Bill is amazed that privately held startups can raise $1B in capital without profits. I'm amazed that the Valley can see the same phenomenon and still think venture funding isn't causing another bubble. Bill also sees that startups launching variants of success stories is a sign of a market top, overfunding, and too much comfort with risk. He nailed the missing link in Big Data analytics: Pareto optimization.
I have to disagree with Bill Gurley on two points before I move on. I don't share his thoughts on Uber or the effects of market corrections. First, he said Uber's ease of use redefines its local driving use cases beyond the TAMs of the taxi and limo market historical sizes. Okay, but I still say Uber's TAM is still limited urban, upper middle class transport. The outsize use of Uber in San Francisco is probably a phenomenon of tech workers and their funded ecosystems (consultants, media people, nannies, gourmet cooks) living inside the new tech bubble! Secondly, Bill thinks the 2009 market correction wasn't as painful for startups and VCs as the 2001 correction. Hey Bill, the Fed lowered rates so quickly after the 2008 crisis that risky things looked a lot safer than in 2001. Hardly anyone in the Bay Area can see the Fed's bubble now . . . except me.
Here comes the wearables boom, according to the next crop of luminaries on stage. The panelists think software is the key to viable wearables, but frankly the ones I've seen at tech fests have no shortage of analytical horsepower. These things need to have physical and visual appeal just like jewelry, because ordinary folks will be proud to show off a status symbol. The coolest thing learned from these experts was about regulatory loopholes applying to consumers who take control of their own data. Medical privacy focuses on transmission confidentiality. Voluntary patient use of medical wearables IMHO opens up a an indemnification can of worms for health care providers even with the devices' obvious benefits.
The team from 451 Research crunched the numbers for a look back at last year's top 250 startup picks. The AlwaysOn SVIS show is one of the few conferences I've attended that holds itself accountable this way. Several of last year's top picks went to IPO at valuations over $1B. Apps, e-commerce, and mobility were the most active acquisition segments. Analytics was a big common denominator. Strategic buyers were the vast majority of acquirers. The most important conclusion is that AlwaysOn's companies have exit valuations at premiums (measured by multiples of trailing revenues, both average and median) to most startup exits.
Cloudera got a special fireside chat as the summit's company of the year. Their talent bench is pretty deep with people who worked at Google, Yahoo, Facebook, and Oracle. I agree with their CEO that a salesperson with a technical background can easily be seen as a client's trusted advisor. He's in the school of thought that startups raising lots of capital gain a flexible IPO date and create a secondary market for any early investors seeking an early exit. His observation that most popular management books merely restate common sense reminds me of my undergraduate days when "reengineering" and the "learning organization" were the hot ways for consultants to make a buck.
Tony Perkins kicked off the second day of SVIS with a segue from app and smartphone dominance into a keynote from Smaato. These guys are understandably fond of the freemium model for apps because it allows advertising penetration. Mobile ads have scaled rapidly, certainly beyond my own expectations. The latest hot term for big sites like Facebook is data management platform (DMP), which encompasses both users data and ad network data. The Smaato dude must be reading my blog or something, because he noticed that the smartphone is becoming a hub for other wearables. I've been blogging about that since late 2013. Wait until the smartphone becomes the power management hub as well as the data warehouse and connectivity platform for wearables. Here's another game-changer I'll throw at the world. New programmatic ad pattern buys can address bids for similar demographics in parallel. This means ad buyers pay more for precise demographic targeting, and users still get free content. Smaato is catching on to this potential by doing both RTB and SSP.
The next panel addressed the multi-billion dollar mobile ad opportunity. I get the difficulty of measuring how ad spending drives revenue, even for SMBs running location-based ads, and the integration of RTBs and SSPs into DMPs is supposed to make that seamless. I wanted to hear more from the panel about how shortening a sales cycle makes the ROI of ad spending instantaneous but they moved on pretty quickly. IMHO ad buyers are slowly recognizing the power of mobile ad spending combined with geolocated user data to drive campaigns that quickly clear out unwanted inventory. The panel thinks about 50% of brand ad spending is wasted but marketing analysts don't know how to identify that waste, thus they pay twice what they should to build brands in target markets. It wasn't always obvious (at least to me) that mobile ad gurus would figure out how to translate ad form factors from print to the various mobile platforms, but they have certainly succeeded.
Will cybersecurity really get worse before it gets better? The next set of experts on stage at AlwaysOn said the mobile threat landscape is small but persistent. I do not think making mobile OSs more secure will solve security problems at the user level as long as app developers are not building security into their apps. The three legs of security, convenience, and performance in mobile computing mean one factor must diminish if another is to be enhanced; so far this is a zero-sum game. Enterprises have methods to manage the risks of tradeoffs between these areas, and not just from a Cloudonomics perspective. I've addressed enterprise risk before and my readers know what I would do. Constructing a 2x2 matrix of severity versus probability allows plots of security incidents in each quadrant, and the risk profile for each quadrant should include Six Sigma estimates of their impact on operations. I can lead horses to water on this blog but I can't make them drink. Security is always an afterthought for product designers because they build for functionality first. Performance and convenience are the factors that meet market opportunities because "security" is only a pain point for a savvy subset of each market segment. The IT/OT convergence means security must catch up.
The "last-second economy" panel said Uber's success leveraged Bill Gurley's network multiplier effect, but I'm not sure the sharing economy qualifies as a back-end process. That philosophy is not some internal part of the enterprise, folks. It's common knowledge that Millennials are driving early adoption of instant economy concepts. We have not heard the last of sharing commodified services.
Bill Cleary was up next to address Apple's market dominance. He sounded like a pretty cool dude. I never thought of Apple's top brand as a compelling narrative on its own until Bill positioned it that way. The cool, hip ad images Apple uses are part of that narrative. Apple's genius is seeding its brand into pop culture channels so that it's not seen as solely a techie image. It was totally awesome to hear bill ridicule Google Glass, Amazon drone delivery, and driverless cars. Someone finally has some great insights into unworkable tech that gets undeserving praise. I offered my only question of the conference when I asked Bill whether Apple would make a 3D printer for the desktop manufacturing revolution. Bill said not yet because it's too early; Apple needs to focus on other things first.
Other panelists spoke on how growth companies can leverage the cloud. Customer demand for speed and performance means startups will have to go to the cloud to scale up. Delayed page loads cause incremental revenue losses and caching content in other time zones is not a universal solution. IaaS is a good solution for pre-populated caches. The next amazing developments we can expect in the cloud are hybrid cloud brokering, data security partitions by nation, and ubiquitous cloud services as reliable utility-type background activities. I repeat all of this cloud thinking uncritically because I want to see how it shakes out.
The Expensify dude easily had the best keynote of SVIS, with spontaneous applause. He ripped apart the financial metrics that so many tech followers throw around as conventional wisdom. If valuation is more than revenue and a multiple derived from a "vroom model," then ROI must be more than LTV divided by CAC. This made his point about the difficulty of attributing sources of both costs and revenues. Nouveau enterprise valuations are not quantifiable by traditional metrics. We need new economic concepts to replace unquantifiable estimates.
The video boom panel noted how online video is now a completely personalized experience. Every enterprise wants to create video because it is the most emotionally manipulative medium, but creation means nothing without distribution. I just don't see how video startups can succeed by incentivizing viewers to watch videos simultaneously with their networks of contacts, given the medium's personalization. No one wants to see their friends making faces on a screen while they're watching a movie. Viral videos are sharable because people watch them individually at their convenience, no communally. I'm pretty sure a whole bunch of venture investment money is about to be wasted on sharable video features that no one will use. Multi-channel networks (MCNs) are figuring out how to use YouTube to distribute content and capture shared ad revenue. The panelists made some bold predictions about how Google could enable video distribution in Gmail and how pervasive video will become in our lives.
The final panel covered one topic that provides me with no end of blog fodder . . . Bitcoin. Yes, the cryptocurrency I love to ridicule has a whole slew of experts ready to sing its praises and raise venture money. Listening to them gave me several OMG moments. So many things they claimed about Bitcoin were nonsense. Transactions are not at all frictionless given the market's illiquidity and the unreliability of Bitcoin exchanges. Bitcoin does not ignore national borders because some nations do treat it differently; look at China's outright bans and the US's IRS tax treatment rulings. Come on, people. I almost went slack-jawed when one guy said he was proud to accept Dogecoin with a straight face. Wow. The dude also praised Silk Road as a "great use case" for Bitcoin's privacy. Wow. In case you missed it (ICYMI), Silk Road was a online market for illegal drugs that the FBI shut down, and Bitcoin did not shield any of its particpants' privacy because they caught the "Dread Pirate Roberts" dude who owned the site. None of these panelists had any user advantages in mind. None could explain why Bitcoin transactions are a better value than national currencies. All of these thought leaders resorted to easily disproven claims and cargo cult wishful thinking about a "knowledge economy." I'll give kudos to one guy who debunked the power of the "network effect" to speed adoption.
Any of you who are unfamiliar with my thinking on Bitcoin must read my extensive blog history on the subject. Claims to marry cryptocurrency and trusted computing will always ring hollow. Device hardware securing a private key does nothing to restore a key if the hardware is stolen. Losing the hardware storing a private key means losing the Bitcoin if the private key isn't backed up. One dude told me during one of the breaks that he thought Bitcoin was the greatest thing he's seen in forty years of trading currencies. His rationale was that machines and bots could use it to trade with each other. Ooookaaaay. Folks, automated trading already happens in the hedge fund world with conventional currencies, and it adds zero liquidity to the global economy. People pushing for the Internet to have its own currency don't understand that the Internet is not a sovereign government. Using Bitcoin as a remittance mechanism for overseas expats makes no sense at all because Google Wallet already allows currency transfer as an email attachment. A lot of people pushing cryptocurrencies will learn some very hard lessons about the real world.
Those of you who need more than my very faithful paraphrasing of what these speakers said can check out the SVIS 2014 archived videos on the AlwaysOn network. This conference was a very valuable use of my time. They had real honest-to-goodness expert speakers who have actually accomplished important things in the tech sector. The lists of top 250 startups they keep generating are terrific coincident indicators of tech funding trends. I'll see them next year for the next 250 great things.
I spent the next two days at the Computer History Museum receiving the wisdom of the Valley's all-stars. Tony Perkins has been tracking tech trends since the 1990s dot-com boom when he launched Upside and Red Herring. I still have a couple of hard copies of those mags in my archives. I also have hard proof that I attended the show, in my typical name badge photo. The bolded comments are my original action items, for any of you enterprise folks who are need a clue.
Satjiv Chahil let us all know that the world is not flat after all, as Thomas Friedman once wanted us to believe. His work with the American India Foundation develops the digital and physical infrastructure of rural India. The foundation uses street theater to advertise their developments in India in a native twist on Silicon Valley's guerrilla marketing styles. Satjiv advised innovators to think of the cost structures in the rest of the world. I think I know how that applies . . . cheap labor is everywhere but immature infrastructure complicates product delivery.
The discussion of new opportunities in data analytics covered the the changing real-time information that data fusion culls from formerly static sources. I agree that data users are starved for real-time info and I believe the proliferation of APIs allowing data manipulation is just getting started. I was not surprised to hear them say "Chief Data Officer" and "Chief Analytics Officer" are emerging enterprise titles. I suspect that the CDO/CAO should work with the CKO under the COO, not the CIO, which would cement BI as a KM function. Follow the acronyms to victory. These guys got me thinking about KPIs, which tends to happen when I hear something thought-provoking. IMHO those verticals that are the fastest adopters of real-time KPIs will be those that must integrate the most data streams. The sheer number of discrete data streams flowing into an enterprise will drive analytics solutions, rather than gross data volume.
The venture capital outlook for 2014 implied that current tech funding is a boom and not a bubble. I was stunned that most of the audience (82%) in the live poll thought startup valuations were not in a bubble. Come on, people, the Fed's ZIRP stimulus has made everything a bubble by driving normally risk-averse investors to seek yield in riskier assets. I would hate to be in some VC's shoes in a couple of years when they have to explain their cratering venture funds to institutional investors. Anyway, I appreciated the panel's assessment that the amount of capital needed to start a tech company is at a record low, but scaling it up requires a record high amount. High-valuation exits in some verticals like social media are easier because they're cheaper to scale. I did not know that the M&A market in tech is twice as big as the IPO market, mainly because big tech companies like to grow with acquisitions. These VCs are among the few I've heard who admit that the crowdfunding movement is on fire. I can't wait to see the crowdfunding portals with the largest numbers of accredited investors get acquired by brokerages.
Online education is at some inflection point, according to the next set of experts. MOOCs that assemble distributed content in playlists will resemble online music stores. The challenge to universities is clear, but I believe the panelists' expected shakeout of failing colleges will be delayed as long as low interest rates keep student loans widely available. Bad models can survive longer than they should even with poor content, but I agree with the panelists who expect distributed content to reign. They introduced the term "knowledge portfolios" defining the marketable skill sets people will port from more scalable education models. I see a role for the US Department of Education in helping to accredit MOOCs and develop universal standards that make their content portable, once said Department loses its rationale for funding soon-to-be-gone campuses. I see their optimism for course offerings favoring entry-level job skills with an immediate ROI, and I'll raise them the next step in educational innovation: disrupting state-run K-12 schools.
The "top company presentations" were actually pretty compelling at SVIS. A lot of such pitches at conferences leave me with little hope that entrepreneurs have a clue. That was not the case at SVIS. I'll offer up a few random observations as blind items, since much of what the presenters offered was proprietary. APIs allowing data collection and aggregation should be monetizable, especially since they show promise in replacing advertising servers and accelerating lead generation. Data-source agnostic computing is great but it must allow for virtualization, and virtualization in turn can solve a lot of cloud collaboration problems. Exchanging consumer rewards points on exchanges makes me think arbitrage will be possible. One app doing both visual messaging and photo sharing is not an elegant solution because those are two very different functions. I am very impressed with automated analytics that deploy results using visualization tools, because it's perfect for Peter Principle middle managers who would otherwise have to hire expensive outside consultants just to understand their own data.
Tony Perkins probed the CircleUp guy for crowdfunding insights. They discussed the higher IRR for consumer retail startups, which IMHO is counterintuitive given the earlier panel's observation that scaling up is costlier than ever. I would like to see consumer product startups address obvious gaps like urban "food deserts" underserved by grocery stores. I get CircleUp's model of charging startups a commission and taking part in their warrants, and I think other portals can tweak this by adding revenue streams from investors who participate in a raise.
Jay Samit gave a brilliant lunchtime keynote on decoding disruption. His mantra for cannibalizing one's business in favor of disruptive product development would be lost on Microsoft and other big firms notorious for product managers defending their turf. I was one of the audience members who chuckled when he sketched out the post-literate world's penchant for communicating with images. Wait until the images have embedded geodata, Jay, when they'll be more data-dense than ever. Jay thinks smart shoes are on the horizon because walking recharges batteries, and Apple does have a patent for shoe sensors. I will spend the next year or so examining tech startups through his social / location / mobile lens, which will probably bring me back to the geodata hint I dropped above.
Tony Perkins followed Jay's act with his own keynote. Alvin Toffler's "infobesity" means saving steps in what people already do will build billion-dollar companies. Got it, Tony, and lots of people working at Facebook agree with you. He pitched the AlwaysOn model connecting its subscribers to emerging trends, and it sure worked because, hey, I attended, and I'm "always on" hot trends. I like their crowdfunding platform concept . . . but I'm pretty sure they'll have to register it as a broker dealer given emerging SEC and FINRA rules. This will challenge their ownership structure and I'm not sufficiently knowledgeable of securities law to say whether this portal should be a separate entity. The business profiles they plan to publish for clients strongly resemble IPO "tombstone" ads, which are traditionally in the SEC's lane. I'm pretty sure they can iron out the legalese to fulfill Tony's vision of disintermediating venture investing from the human gatekeepers on Sand Hill Road.
The Big Data panel enlightened me on how in-memory computing is a huge leap ahead in database order processing by creating a new layer in the software stack. They admit that selling enterprise-level Big Data deployments is a challenge. I knew that from several previous conferences. It's a challenge because the solutions are pretty much the same price regardless of seat counts, which means the price doesn't scale along with the tech. The panel thought that opportunities also come from layering apps and and blending data science with business domain knowledge. I already knew that too, thanks to my attendance at Decision CAMP 2013, and you'll know it too once you read my blog article on that event. I say the KM / DM / BRMS confluence is still the ultimate Big Data opportunity. Cloudonomics calculations will validate the ROI of cost savings from business process improvements. The panel wants business analytics to replicate VCs' pattern recognition abilities to help identify winning business models. There's already plenty of historic data on startup failure for them to aggregate from the NVCA, National Science Foundation, and other sources. I must disagree with one panelist who said privacy concerns will be a future trend. I believe that people don't care as much about privacy as they say they do. The whole concept is an anomaly of the first two Industrial Revolutions and it will not survive much longer as Big Data erases anonymity.
The social enterprise panel reveled the audience's displeasure with the amount of time spent communications tech. One consensus point was that enterprise power users are in non-techie business domain functions who prefer simple tools. I'm pretty sure the growth curve in social enterprise solutions will slow if business domains can't prove these things generate results. Corporate treasuries aren't unlimited, people. Where are the CKOs and COOs in all this? Are they ever going to figure out that crafting enterprise KPIs is their job? I know it's hard in fragmented organizations but it's worth the effort to grab project leaders and shake out their team-level KPIs.
Bill Gurley demonstrated his genius in his fireside chat on the instant economy with Tony Perkins. His take down of the dot-com stock analysis algorithim was brilliant. No one should assume an implied CAGR over 100% for several years running. He also thinks it's a mistake to assume future bubble peaks will asymptotically match some previous bubble peak. Yeah, this bubble peak has already surpassed the previous several. The good news is that corporate VCs are the dumb money in the room, timing their investments poorly and ramping their buys prior to market highs. I'll be sure and tell any startups I meet to pitch to corporate VCs in the best of times. I learned from Bill that long-term, high square foot leases were a major reason for startup bankruptcies and recapitalizations in the 1990s dot-com bubble! Wow. That means the commercial real estate sector's health in major tech corridors is a pretty good leading indicator for tech bubbles. I now feel sorry for anyone working at a VC-backed tech startup with its own gourmet food court; those luxury amenities add unneeded costs to their leases. Here's a classic Gurley line: Discounting long term risk makes us comfortable, "like a boiling frog." Awesome! Imagine it spoken with the remnant of Bill's original Texas accent. Bill is amazed that privately held startups can raise $1B in capital without profits. I'm amazed that the Valley can see the same phenomenon and still think venture funding isn't causing another bubble. Bill also sees that startups launching variants of success stories is a sign of a market top, overfunding, and too much comfort with risk. He nailed the missing link in Big Data analytics: Pareto optimization.
I have to disagree with Bill Gurley on two points before I move on. I don't share his thoughts on Uber or the effects of market corrections. First, he said Uber's ease of use redefines its local driving use cases beyond the TAMs of the taxi and limo market historical sizes. Okay, but I still say Uber's TAM is still limited urban, upper middle class transport. The outsize use of Uber in San Francisco is probably a phenomenon of tech workers and their funded ecosystems (consultants, media people, nannies, gourmet cooks) living inside the new tech bubble! Secondly, Bill thinks the 2009 market correction wasn't as painful for startups and VCs as the 2001 correction. Hey Bill, the Fed lowered rates so quickly after the 2008 crisis that risky things looked a lot safer than in 2001. Hardly anyone in the Bay Area can see the Fed's bubble now . . . except me.
Here comes the wearables boom, according to the next crop of luminaries on stage. The panelists think software is the key to viable wearables, but frankly the ones I've seen at tech fests have no shortage of analytical horsepower. These things need to have physical and visual appeal just like jewelry, because ordinary folks will be proud to show off a status symbol. The coolest thing learned from these experts was about regulatory loopholes applying to consumers who take control of their own data. Medical privacy focuses on transmission confidentiality. Voluntary patient use of medical wearables IMHO opens up a an indemnification can of worms for health care providers even with the devices' obvious benefits.
The team from 451 Research crunched the numbers for a look back at last year's top 250 startup picks. The AlwaysOn SVIS show is one of the few conferences I've attended that holds itself accountable this way. Several of last year's top picks went to IPO at valuations over $1B. Apps, e-commerce, and mobility were the most active acquisition segments. Analytics was a big common denominator. Strategic buyers were the vast majority of acquirers. The most important conclusion is that AlwaysOn's companies have exit valuations at premiums (measured by multiples of trailing revenues, both average and median) to most startup exits.
Cloudera got a special fireside chat as the summit's company of the year. Their talent bench is pretty deep with people who worked at Google, Yahoo, Facebook, and Oracle. I agree with their CEO that a salesperson with a technical background can easily be seen as a client's trusted advisor. He's in the school of thought that startups raising lots of capital gain a flexible IPO date and create a secondary market for any early investors seeking an early exit. His observation that most popular management books merely restate common sense reminds me of my undergraduate days when "reengineering" and the "learning organization" were the hot ways for consultants to make a buck.
Tony Perkins kicked off the second day of SVIS with a segue from app and smartphone dominance into a keynote from Smaato. These guys are understandably fond of the freemium model for apps because it allows advertising penetration. Mobile ads have scaled rapidly, certainly beyond my own expectations. The latest hot term for big sites like Facebook is data management platform (DMP), which encompasses both users data and ad network data. The Smaato dude must be reading my blog or something, because he noticed that the smartphone is becoming a hub for other wearables. I've been blogging about that since late 2013. Wait until the smartphone becomes the power management hub as well as the data warehouse and connectivity platform for wearables. Here's another game-changer I'll throw at the world. New programmatic ad pattern buys can address bids for similar demographics in parallel. This means ad buyers pay more for precise demographic targeting, and users still get free content. Smaato is catching on to this potential by doing both RTB and SSP.
The next panel addressed the multi-billion dollar mobile ad opportunity. I get the difficulty of measuring how ad spending drives revenue, even for SMBs running location-based ads, and the integration of RTBs and SSPs into DMPs is supposed to make that seamless. I wanted to hear more from the panel about how shortening a sales cycle makes the ROI of ad spending instantaneous but they moved on pretty quickly. IMHO ad buyers are slowly recognizing the power of mobile ad spending combined with geolocated user data to drive campaigns that quickly clear out unwanted inventory. The panel thinks about 50% of brand ad spending is wasted but marketing analysts don't know how to identify that waste, thus they pay twice what they should to build brands in target markets. It wasn't always obvious (at least to me) that mobile ad gurus would figure out how to translate ad form factors from print to the various mobile platforms, but they have certainly succeeded.
Will cybersecurity really get worse before it gets better? The next set of experts on stage at AlwaysOn said the mobile threat landscape is small but persistent. I do not think making mobile OSs more secure will solve security problems at the user level as long as app developers are not building security into their apps. The three legs of security, convenience, and performance in mobile computing mean one factor must diminish if another is to be enhanced; so far this is a zero-sum game. Enterprises have methods to manage the risks of tradeoffs between these areas, and not just from a Cloudonomics perspective. I've addressed enterprise risk before and my readers know what I would do. Constructing a 2x2 matrix of severity versus probability allows plots of security incidents in each quadrant, and the risk profile for each quadrant should include Six Sigma estimates of their impact on operations. I can lead horses to water on this blog but I can't make them drink. Security is always an afterthought for product designers because they build for functionality first. Performance and convenience are the factors that meet market opportunities because "security" is only a pain point for a savvy subset of each market segment. The IT/OT convergence means security must catch up.
The "last-second economy" panel said Uber's success leveraged Bill Gurley's network multiplier effect, but I'm not sure the sharing economy qualifies as a back-end process. That philosophy is not some internal part of the enterprise, folks. It's common knowledge that Millennials are driving early adoption of instant economy concepts. We have not heard the last of sharing commodified services.
Bill Cleary was up next to address Apple's market dominance. He sounded like a pretty cool dude. I never thought of Apple's top brand as a compelling narrative on its own until Bill positioned it that way. The cool, hip ad images Apple uses are part of that narrative. Apple's genius is seeding its brand into pop culture channels so that it's not seen as solely a techie image. It was totally awesome to hear bill ridicule Google Glass, Amazon drone delivery, and driverless cars. Someone finally has some great insights into unworkable tech that gets undeserving praise. I offered my only question of the conference when I asked Bill whether Apple would make a 3D printer for the desktop manufacturing revolution. Bill said not yet because it's too early; Apple needs to focus on other things first.
Other panelists spoke on how growth companies can leverage the cloud. Customer demand for speed and performance means startups will have to go to the cloud to scale up. Delayed page loads cause incremental revenue losses and caching content in other time zones is not a universal solution. IaaS is a good solution for pre-populated caches. The next amazing developments we can expect in the cloud are hybrid cloud brokering, data security partitions by nation, and ubiquitous cloud services as reliable utility-type background activities. I repeat all of this cloud thinking uncritically because I want to see how it shakes out.
The Expensify dude easily had the best keynote of SVIS, with spontaneous applause. He ripped apart the financial metrics that so many tech followers throw around as conventional wisdom. If valuation is more than revenue and a multiple derived from a "vroom model," then ROI must be more than LTV divided by CAC. This made his point about the difficulty of attributing sources of both costs and revenues. Nouveau enterprise valuations are not quantifiable by traditional metrics. We need new economic concepts to replace unquantifiable estimates.
The video boom panel noted how online video is now a completely personalized experience. Every enterprise wants to create video because it is the most emotionally manipulative medium, but creation means nothing without distribution. I just don't see how video startups can succeed by incentivizing viewers to watch videos simultaneously with their networks of contacts, given the medium's personalization. No one wants to see their friends making faces on a screen while they're watching a movie. Viral videos are sharable because people watch them individually at their convenience, no communally. I'm pretty sure a whole bunch of venture investment money is about to be wasted on sharable video features that no one will use. Multi-channel networks (MCNs) are figuring out how to use YouTube to distribute content and capture shared ad revenue. The panelists made some bold predictions about how Google could enable video distribution in Gmail and how pervasive video will become in our lives.
The final panel covered one topic that provides me with no end of blog fodder . . . Bitcoin. Yes, the cryptocurrency I love to ridicule has a whole slew of experts ready to sing its praises and raise venture money. Listening to them gave me several OMG moments. So many things they claimed about Bitcoin were nonsense. Transactions are not at all frictionless given the market's illiquidity and the unreliability of Bitcoin exchanges. Bitcoin does not ignore national borders because some nations do treat it differently; look at China's outright bans and the US's IRS tax treatment rulings. Come on, people. I almost went slack-jawed when one guy said he was proud to accept Dogecoin with a straight face. Wow. The dude also praised Silk Road as a "great use case" for Bitcoin's privacy. Wow. In case you missed it (ICYMI), Silk Road was a online market for illegal drugs that the FBI shut down, and Bitcoin did not shield any of its particpants' privacy because they caught the "Dread Pirate Roberts" dude who owned the site. None of these panelists had any user advantages in mind. None could explain why Bitcoin transactions are a better value than national currencies. All of these thought leaders resorted to easily disproven claims and cargo cult wishful thinking about a "knowledge economy." I'll give kudos to one guy who debunked the power of the "network effect" to speed adoption.
Any of you who are unfamiliar with my thinking on Bitcoin must read my extensive blog history on the subject. Claims to marry cryptocurrency and trusted computing will always ring hollow. Device hardware securing a private key does nothing to restore a key if the hardware is stolen. Losing the hardware storing a private key means losing the Bitcoin if the private key isn't backed up. One dude told me during one of the breaks that he thought Bitcoin was the greatest thing he's seen in forty years of trading currencies. His rationale was that machines and bots could use it to trade with each other. Ooookaaaay. Folks, automated trading already happens in the hedge fund world with conventional currencies, and it adds zero liquidity to the global economy. People pushing for the Internet to have its own currency don't understand that the Internet is not a sovereign government. Using Bitcoin as a remittance mechanism for overseas expats makes no sense at all because Google Wallet already allows currency transfer as an email attachment. A lot of people pushing cryptocurrencies will learn some very hard lessons about the real world.
Those of you who need more than my very faithful paraphrasing of what these speakers said can check out the SVIS 2014 archived videos on the AlwaysOn network. This conference was a very valuable use of my time. They had real honest-to-goodness expert speakers who have actually accomplished important things in the tech sector. The lists of top 250 startups they keep generating are terrific coincident indicators of tech funding trends. I'll see them next year for the next 250 great things.
Thursday, August 07, 2014
The Haiku of Finance for 08/07/14
Tech change at high speed
Spend on capex and research
Stay at leading edge
Spend on capex and research
Stay at leading edge
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