SOPHISTICATED FINANCE

Facebook Stock Price Slides

Facebook is now trading at 24% below the IPO price. This is a significant price adjustment for a new stock (or any stock) and suggests that the bankers overpriced the stock at the IPO. Aswath Damodaran, the legendary NYU finance professor, explains where the bankers went wrong in this excerpt from Business Insider:

"I think the investment bankers priced the offering based on how shares of Facebook were trading in the private market and their assessments of institutional demand. I don't think that revenue growth, margins, risk or any other fundamentals played much of a role in the pricing. I don't fault them for playing the momentum game, but they played it badly."

Most stocks do not have a large active private market prior to their IPO. Facebook established their private market partly as a means to provide liquidity to the founders and perhaps to provide some support for an aggressive valuation at the IPO. 

As crowd funding grows as a means to fund startups and other private markets in pre-IPO stock emerge, perhaps one should be cautious about these markets as a basis to price IPOs. 

 

Information Curation

I am always intrigued by companies trying to curate information. I continue to believe it is huge business opportunity. Last post on this theme is here.

From the Live to Close website comes Industry Dive, described here. Industry Dive provides original content as well as a collection of articles, posts and tweets by industry.

I have been following Live to Close for about ten days and they consistently post on interesting startups.

Government in Crisis?

Interesting quotations from Cafe Hayek today:

"All government policies adopted to meet a crisis presume that the government knows how to effect the rescue it seeks. If the crisis arises from an attack by foreigners, the government purports to know how to mount military countermeasures that will defeat or disable the enemy. If the crisis consists of economic malfunctions, the government purports to know how to alter its spending, taxing, or regulation so that the economy will be restored to sound operation. These presumptions are in general counterfactual." Delusions of Power by Robert Higgs

"Public policies are determined and laws are made by small minorities playing upon the fears and imbecilities of the mob – sometimes minorities of intelligent and honest men, but usually minorities of rogues." H.L.Mencken

Most Recent Popular Post

No blogging this week due to travel so I have posted some links to recent popular posts:

Lessons from 100 Years at IBM 

Cisco Strategy vs Huawei

The Digital Age is Not a Solution

Hands on Learning

Social Entrepreneurship, Corporate Social Responsibility and Shared Value

 

 

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• The Ten Best Posts of 2011 (sophisticatedfinance.typepad.com)

LinkedIn News

In July 2010 I wrote a very popular post titled "A Strategy for LinkedIn". In the post I recommended:

"The second feature I would add to LinkedIn is a Hacker News for business. Hacker News is a very simple site where people post the best posts on technology from a wide range of sources including blogs, corporate media (e.g. NYT) and white papers. The content is not moderated but the users create such rich content that I sometimes think that if I had only one RSS feed to read every day it would be Hacker News. A "Business News" on LinkedIn would bring readers to the website more often to post articles, would over time probably produce a better source of business information for the members than the automated sites such as Google News or Yahoo News and again could be a new revenue source for LinkedIn through ad revenue."

In mid-2011 LinkedIn started LinkedIn Today, member curated business news. I have been a reader every day since it launched and the quality of the articles is very high. I recommend it.

Probably just a coincidence that LinkedIn did what I said in a post, but if anyone needs a consultant to increase web traffic maybe I can help:)

Education and Social Inclusion

The quote below by Richard Wolin in the May 21, 2012 issue of The Nation explains the relationship between education and social inclusion.

"For the first time, men and women of diverse social backgrounds were afforded the opportunity to cultivate the knowledge and self-understanding necessary to surmount the oppressive constraints of class, race and gender."

The reference is to the GI Bill that paid for WWII veterans to attend college in the U.S.

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City-States and Romer's Idea of Urbanization

Paul Romer Français : Paul Romer Deutsch: Paul Romer (Photo credit: Wikipedia)

In a recent post "The Digital Age is Not a Solution" I argued that perhaps we need to redefine the role of federal government to meet the challenges from increasing population density. An alternative to that approach which I thought about but did not include in the post was to re-establish city-states.

An additional three billion people will move into cities in the next forty years and the percent of urban population will be well in excess of 50%. This trend will bring population density to unheard levels, which should force humans to re-organize in a significant way, such as changing the current form of federal governments.

It should also be noted that the number of large cities, over 30 million population, will increase dramatically and these cities will be larger than many countries. These cities will have significant economic interests to protect, which may not be consistent with the objectives of their countries. Therefore, we could see the emergence once again of city-states. 

This might appear to be a perfectly crazy idea, except for economist Paul Romer's idea. Romer has proposed the idea of charter cities, "economic zones founded on the land of poor countries but governed with the legal and political system of, often, rich ones". Romer proposed the idea as a means to create economic growth in poor countries. These charter cities would not be subject to the existing cultural, social and political constraints of many poor countries by establishing independent cities governed by more advanced legal and economic systems. Sounds like city-states to me.

More on Romer's idea of charter cities here.

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Hands on Learning

Saturday I taught a boating safety course for young children (8-13) and adults through the Coast Guard Auxilary. What I always marvel at in these classes is the enthusiasm the children bring to learning about boating. I use a lot of question and answer to develop the themes and the children actively participate. I have noticed that how one handles a wrong answer is critically important. Any negativity in my response and the child shuts down for the rest of the day and stops participating. I think that even at this young age schools have already conditioned the children not to make mistakes.

Talking to one of the parents during the lunch break provided an interesting insight. He talked about how many, many mistakes he had made when he first started boating, but that over time he had become more accomplished. In other words, he had not stopped boating because he had made mistake after mistake. Three observations:

1. Boating is a very "hands on" activity with little theory or complex concepts to master before starting out. By doing boating one learns to safely and successfully operate the boat
2. When you learn boating by yourself, you have no one to criticize you (except perhaps a terrified wife) and you overcome the mistakes over time
3. With thousands of dollars invested in a boat, one is motivated to learn how to do it.

Much of the way one learns boating mirrors Piaget's theory of how children learn. The learning is hands on, self-directed and with little input from a teacher. 

I am increasingly coming to enjoy teaching young children. They are like sponges if you do not snuff out their natural enthusiasm. Maybe I should start a charter school using a boat. Wonder how expensive a marine Internet connection is? 

Image credit: watersport-insight.com

Make Fewer Excuses

Daniel Kahneman (Photo credit: Wikipedia)

Forbes had an interesting article on how to be successful. Citing the research of Nobel Laureate psychologist Daniel Kahneman, the article states that emotional intelligence (EQ), moral intelligence and body intelligence are more important than IQ in predicting individual success. To improve moral intelligence, how one manages "integrity, responsibility, sympathy, and forgiveness", Forbes recommended to make fewer excuses.

I am very fond of lessons from the military (several links here) in teaching individual behavior and management. New soldiers are taught three ways to answer a question:

1. Yes sir
2. No sir
3. I do not know sir

From the beginning soldiers are taught not to make excuses. You will also save a lot of time by eliminating excuses :)

 

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The Digital Age is Not a Solution

I have written frequently about the changing role of the individual in the Digital Age (here and here to cite two posts). In Einstein's Ideas and Opinions he describes how the Renaissance was a period where individuals made the significant contributions. As population became more dense, the need arose for organizations, as the means to address society's problems. These organizations developed the technology to make themselves more effective and efficient. In summary, as population density changes humans reorganize to address the new problems and develop supporting technology.

Basically, I think we are at another one of those inflection points based on population density. My reasoning is as follows:

• The population will increase by approximately 50% by 2100 to 10 billion
• Over 50% of the population now live in cities and the rate is increasing
• Wide spread discussion of public private partnerships to address social problems indicates a need for a new form of organization
• The easy gains in productivity improvement from computer technology are over because computing technology is now fully developed. (See article here.)

If the choices to address the population density problem are two-- individuals or organizations-- and organizations have reached their point of maximum efficiency and effectiveness with current technology: then we have three choices:

1. Find new technology that addresses the need for greater effectiveness and efficiency in the current forms of organization. Perhaps the use of outer space is the answer (Go Get an Asteroid Academic VC). Some experts say that we have waited too long and no technology can save us from population growth.
2. Redefine the individual through technology. Some might argue that crowd sourcing and (social) networking are proof that the role of the individual is again changing, but neither of these examples produce any meaningful gains in productivity or efficiency. To improve the effectiveness of the individual we have to harness a greater percentage of their intelligence or their physical productivity. Perhaps embedding computing devices inside the person is the answer. 
3. Redefine government, as a significant form of organization, perhaps returning to minimal government. Government originally emerged as a means to prevent unfair interference to people and markets. Over time that role expanded and government became  a substitute in many ways for individual empowerment. Perhaps we need to return to an environment where the individual is more responsible and the government is a referee and not a player.

In conclusion, this is not a post about the dangers of population growth. Human beings re-organize when population density changes (Einstein). I think we have exhausted the benefits from the current forms of organization. We have maxed out the benefits of current computing technology. My guess is we need to re-design the effectiveness of the individual or mankind will fail to address a new era of population density. While the Digital Age is getting all the press, I now think that it is not the technology to address a new era but rather the dramatic end to the last era. Opportunities still exist to better use computer technology, e.g. education, but the bigger opportunities may be in recognizing a new era in the history of mankind. Whether existing governments with their bureaucracies focused on the status quo will permit the necessary changes may be the biggest challenge.

Image credit: bangladesh.um.dk

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Financial Modeling Workshop Miami May 11

I will be doing a workshop for the FIU Pino Entrepreneurship Center on May 11. The workshop focuses on how to build financial models, including an introduction to some advanced Excel commands that make building models easier. This workshop begins where my workshop on business concept development and growth drivers ends. There is an exercise that develops the logic of model building, a digital handout of a linked income statement, balance sheet and cash flow model and a handout of the advanced excel commands.

More details on the workshop are here. Proceeds go to the Pino Center at FIU. If you would like to see a previous presentation, look here. Very practical, little theory, informal style.

Disclosure: I am a member of the Board of Directors of the Pino Entrepreneurship Center.

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Thoughts on Humility

Gaston Acurio at Madrid Fusion 2006 (Photo credit: Wikipedia)

On a recent flight all my electronic devices needed a charge so I read the American Way magazine in Spanish. One story featured renown Peruvian chef Gaston Acurio. When asked to what he attributed his success, he said humility. Humility enabled him to objectively evaluate the results of his cooking and spot the errors.

This point struck a cord because the night before I heard Mohammed Yunus speak at the Hult Global Case Challenge in New York. As a Nobel Prize winner and probably the inventor of social entrepreneurship, the man has some accomplishments to tout. However, the most noticeable quality about Professor Unus is his humility. In a thirty minute speech he never used the word "I" to describe his accomplishments in Bangladesh.

Unus sounded very much like Albert Einstein. I have been reading the arts and letters (not the physics) of this very accomplished thinker. The book is titled Ideas and Opinions. One consistent theme in Einstein's writings and speeches is the fun he poked at organizations (and himself) that gave him awards. Again, humility comes through as one of the strongest messages.

In the matter of 24 hours I have three great examples of world class practioners, all in very different disciplines, but all demonstrating the value of humility. I suspect that you do not become humble after you become world class, but rather humility facilitates world class work. By not being so self-centered you have an easier time to spot your errors (Acurio) and you probably devote more time to your work and less to self-promotion. 

Another benefit of humility is you worry less. All of the students presenting at the Hult Case Challenge were jazzed up and very nervous. Not uncommon at a big event with many people presenting. In a perfect world maybe they were so excited because they did not want to fail their team members, but I suspect that there is another reason. They were all worried about looking bad in front of the audience. Humble people do not worry about such matters and just do the best they can.

Want to worry less. Be more humble.

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Thoughts from a Day at MIT

Schopenhauer, not Christensen from Wikipedia

Clayton Christensen, the well known HBS professor, once said that MIT has the highest density of creativity on the planet. Every time I spend a day at MIT I come to the same conclusion. Two observations inspired by things at MIT last week:

1. In the early days of artificial intelligence (AI) the focus was on the algorithms as the means to make AI productive. This approach proved only marginally effective and AI adoption grew slowly. Recently with the improvement in large database infrastructure and the exponential growth in digital data, researchers have realized that it was the lack of data rather than immature algorithms that was holding back the growth in AI. There are many implications to the accelerating use of AI. One that intrigues me is that computers will increasingly identify the "value" in the data and that this value will be commercialized and subsequently marginalized much faster. Therefore, the opportunity to create large value will increasingly come from outside the bounds of current knowledge, outside the data set. While this has always been true, the easier opportunities in the existing data may quickly be disappearing.
2. Arthur Schopenhauer, the well known 19th century German philosopher, said that music and art make physical the emotions. In most real time digital media one of the challenges is interpreting the emotions and changes in emotional state of the other party. Researchers at the MIT Media Lab are developing sensors to capture and communicate changes in emotion from all parts of the body. Their most well known demonstration is their opera, "Death and the Powers". A possible commercialization of the technology would be for Skype participants to wear sensors during a call. 

Wonder if Schopenhauer would have received a Ph.D from MIT?

 

5 More Productivity Tips

Inc. Magazine had a very good article on how to improve productivity, based on the characteristics of successful people. The characteristics of these productive people were:

• They have a life. Taking breaks to do non-work things gives one a chance to refresh and exposes you to new problems and solutions that can be used in the work environment.
• They take breaks. Constant work depletes ones mental capabilities. Periodic breaks in long projects gives you a chance to refresh the mind and body.
• They have worked in different industries.  Variety in work experience may allow one to bring proven techniques from one industry to problems in another industry.
• They have great outside collaborators.  Once again, networking is critically important. These friends bring fresh ideas to problems and may lead to quicker solutions.

 All of this is good advice, but I thought I would share a few of my own tips:

1.  One-hour meetings. I rarely have meetings for more than one hour. Most adults cannot maintain focus for more than an hour. If properly prepared with documents circulated in advance, 95 percent of matters can be well discussed and solutions arrived at in an hour.
2. Do important things at your best time of the day. Most of us have a biorhythm that makes us an early morning person or a night owl. Learn which you are and do the most demanding tasks during the best period of the day for you.
3. Understand if you should be listening or talking. In most interactions I try to initially set up the purpose of the call/meeting so the time is effectively used and then I basically listen. Give people a chance to talk after setting the objectives and things move more quickly. 
4. State the solution first.  Most people give way too much background in person before they present the solution. Present the solution and then two or three bullet points to support the conclusion. Most people have a lot of background on the matter discussed and can quickly determine if the proposed solution is correct. If the matter is very complex send a short memo or email in advance that outlines the complexity but remember to state your conclusion. You may be able to skip the meeting if the conclusion is accepted based on the writing.
5. Learn to write. Many people are afraid of writing and consequently lose a lot of time preparing to write. Remember this simple rule:

 

•  
  •  
    • Tell them what you are going to say
    • Say it
    • Tell them what you said

Put the energy and time into outlining what you are going to say (the first part of the rule). It's easy to write after you outline the topics.

 

I do not pretend to be a productivity expert, but I have a fairly full schedule between OLPC, consulting, teaching, blogging, book writing, 3-4 workshops and speeches per month and the 4-5 startups and students I typically mentor. In the fall it will be a bit busier when I start teaching a second course at FIU. Always be working on techniques to be more productive. That may be the best tip I can offer.

Image credit: followsteph.com

The Economist Wrong About OLPC in Peru

In a recent article The Economist magazine reviewed the results of an Inter-American Development Bank report on the OLPC project in Peru. While known for its insightful writing, in this case The Economist missed the point. While correctly pointing out that math and language skills showed no noticeable improvement after the children started using their XO laptop, The Economist missed the most important point. In Peru children showed a marked improvement in cognitive skills.

Cognitive skills are important as evidenced by their inclusion in the international PISA tests, which are the bench mark for measuring educational effectiveness worldwide. PISA describes cognitive skills in their 2003 Evaluation Framework as follows:

"Problem solving is an individual's capacity to use cognitive processes to confront and resolve real, cross-disciplinary situations where the solution path is not immediately obvious and where the literacy domains or curricular areas that might be applicable are not within a single domain of mathematics, science or reading." 

Cognitive skills are the higher order skills required to properly process information, evaluate the information in terms of critical thinking and draw original, creative conclusions. While math and language skills may have been of paramount importance in the industrial age, many commentators have identified cognitive skills as critical for success in the digital age of the 21st century.

The 21st century will be a period of individual empowerment with much less reliance on corporate infrastructures and other traditional institutions. The successful individuals will be masters of creating original content, packaging it in multiple forms and marketing it globally. While traditional industries such as agriculture and manufacturing will still make a significant contribution to the world economy, the new opportunities from the digital age will make an increasing economic contribution. However, this contribution is much more likely to come at the individual level rather than through institutions.

Perhaps The Economist needs to update its business model for the 21st century. Then, perhaps The Economist will realize the really meaningful results from the increase in the cognitive skills of the children in Peru. As OLPC is always quick to point out, the children do not need to learn computing but rather learn through the computer. The children of Peru in their environment of limited resources and undertrained teachers have learned the most important skills--cognitive skills. Now we just need for The Economist to recognize it.