SOPHISTICATED FINANCE

Startup Community Miami

Recently there has been a lot of press about the startup community in South Florida and Miami in particular. There was the editorial in the Miami Herald "Miami's Silicon Beach", Brad Feld speaking at Rokk, the One Community One Goal report  and the Miami Herald-FIU Business Plan Competition to mention a few. All of this activity is good to foster interest in startups here in Miami. There is, however, one problem.

In an article, "America's Leading Metros for Venture Capital", the following chart prepared by Zara Matheson of MPI shows the amounts of venture capital invested by city. Miami does not rank in the top twenty U.S. metropolitan areas. Provo, Utah, Phoenix and Pittsburgh have more venture money invested than Miami.

If Miami wants to create a vibrant community for startups we need to attract professional venture capital firms to Miami. When Israel started its high tech community the government created a pool of funds and then turned the management over to foreign private venture firms. Perhaps the government and the private sector in South Florida need to pool their capital and invite 2-3 venture firms to manage the money for local investment in startups. The venture firms selected should specialize in seed and Series A investments. Early stage investing is very local where firms invest typically within 1-2 hours drive. We do not need later stage firms because more mature companies can attract funding from anywhere. 

The other thing that would help is if each local college and university had an incubator, including funding, to invest in student and faculty startups. Universities are a key part of almost every successful startup community. The students and resources of local universities need to be part of any master plan for Miami's startup community.

The entire collection of my posts on venture capital are here.

These are my personal views and do not reflect the opinions of any client, organization or university with whom I am affiliated.

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Diaspora Management

I have spent the last two days in Jamaica, including some time at a convention devoted to the 4-5 million Jamaicans that live outside the country. Currently Jamaica has a local population of 2.3 million. The Jamaican Government call this overseas population the Diaspora. The Government went to Israel to study how that country manages their diaspora or overseas population of religious followers. There are even academics who have developed a set of five best practices for diaspora management. They are all so obvious that I will not repeat them.

As near as I can tell, diaspora management is designed to guilt the overseas population into investing in the homeland as a means to foster economic development. Economic development theory has baffled me for years, despite quite a bit of study of the subject. As this previous post on economic development makes clear, the subject is overly complicated and therefore much of the theory appears to have limited applicability.

Diaspora management appears to me to be another part of economic development theory that is overly complicated. If you want to attract foreign investment, regardless of the source, you need to satisfy four conditions:

1. Free movement of capital across borders
2. A legal system that protects investor rights at the level of developed countries
3. An economic performance that has sufficient stability and growth to attract investors 
4. Market rates of return for the perceived level of risk that are attractive compared to alternative investments (in other countries)

Jamaica is making progress on the necessary conditions outlined above. Personally I think diaspora management is a distraction that will have limited effect on economic development. Increased efforts to build an economy that attracts more foreign investors would be my strategy for Jamaica.

Areas that look particularly attractive to me for investment in Jamaica are agriculture and alternative energy, which are also key industries in the government twenty year plan (in addition to tourism and logistics). Interestingly, Jamaica is trying to build an enormous transhipping facility to take advantage of the expanded Panama Canal in 2014. Project is in the early stages but foreign investors are showing interest. Miami beware!!

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VC Blogs: How to Build a Consumer Network

I always tell my students that they should read the blogs of venture capitalists as a way to easily expand their knowledge of entrepreneurship. Successful VCs are students of new business concepts and the factors that lead to large new businesses. They study ideas and companies from the "napkin stage" through to market traction and scaling. A few VC blogs I especially like for their thorough analysis of issues are AVC, Both Sides of the Table and the posts of Michael Skok.

Josh Ellman has written an excellent post on consumer network companies, "“How will they make money?” is the wrong question". Josh is a Principal at Greylock Partners and formerly worked at Twitter and FaceBook. He cites four factors required to build a successful consumer network:

1. Is there a new behavior here that you can see 100M+ people doing? Is the network going to change the way people think about the world?
2. Is the product evolving in a way where people are getting more and more engaged and committed over time? Are members adding more and more content over time?
3. Will the growth be sustainable? Do new user patterns follow the patterns of early adopters.
4. If the product succeeds at scale, can you monetize the key behaviors? If one builds a large network it can always be monetized by direct purchases or advertising.

One of my pet peeves is all the silly new network concepts that have no future. I hope everyone will read Josh's post in its entirety and evaluate their new business idea against the four factors.

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Entrepreneurship and Life

Passion and Discipline

It has been stated many times that passion is a key to success, whether in business, research or art. Passion can be defined as an intense, enduring motivational feeling or conviction, which extends beyond romance and sexual activity. Passion is one of several emotions we all feel. 

Schopenhauer said that art is the physical expression of emotions. This insight is both profound and useful. It is profound perhaps because of the simplicity it brings to understanding art. It is useful in that it focuses the creator of art inwardly on their own knowledge. Maurice Sendak, not surprisingly, said it better--"knowledge is the driving force that puts creative passion to work".

However, why are so few of us able to use knowledge to produce art? Part of the answer is found in this quote from Isabel Allende, "Writing is always giving some sort of order to the chaos of life." Writing and art comes from the processing of emotions and knowledge in order to reach an understanding. Therefore, art comes from a commitment to reach understanding and the commitment is grounded in discipline. Ursula Nordstrom stated this point beautifully, "emotion combined with the artist's discipline is the rarest thing in the world".

While this post focuses on art, the "trilogy" of passion, knowledge and discipline is a recurring pattern in most creative people regardless of their area of interest. The theme of "order from chaos" also recurs not only in art but also in science and math and perhaps other fields.

This post was inspired by a post on Brain Pickings, "Conjuring Cohesion and Purpose: How Ursula Nordstrom Cultivated Maurice Sendak’s Genius". 

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Dropbox--Who is the Customer?

I went to visit the offices of a friend's new business yesterday. Particularly liked the painting of the Muppets. He told me that he was synching all five of his computing devices so he could work anywhere. Always interested in synching technology, I asked what app he was using. Answer: Dropbox. No new information in that answer. I have been using Dropbox since it first came out in 2008. It is an excellent product with a profound understanding of user interface.

My friend said that his son recommended against Dropbox in favor of Google Drive (formerly Google Docs). My friend's son is 11...11. The son attends a very good private school in Miami where they use Google Drive for all document storage. The son prefers Google Drive because of the larger feature set for collaboration, which is a critical skill for the 21st Century and a very effective learning technique. Points to note--Dropbox:

1. An 11 year old can compare products and determine which one has better collaboration features
2. Google's efforts to penetrate schools with Google Drive is giving them the opportunity to shape software/app selection at an early age
3. If private schools are using Google Drive to facilitate collaboration, public schools will not be far behind.

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Excel Competition--ModelOff 2013

The most popular posts at Sophisticated Finance over the years have been some posts I did on Excel modeling, which are in the link at left called "Excel Models and Tips". All the posts related to Excel are here.

Some folks sent me the announcement for a world championship of Excel Modeling called Modeloff 2013. This is a cash prize competition to find the best young modeler in the world. Competitors are required to have a knowledge of finance and Excel but statistics also looks helpful.

One of the sample questions from the 2012 competition is here. It is a list of 50 tasks in Excel and the competitors had to identify the Excel command. Also a nice review of advanced Excel commands if anyone wants to improve their skills.

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Planning for the Unkown

Someone asked me to do a lecture titled "Planning for the unkown". Initially it sounds like an oxymoron. However, after a little thought I came up with an approach. The process is described below.

Planning is a process, which means that it involves discipline, focus and a step by step approach. However, any process is only as good as the thinker and thinking in the process. Therefore, to consider the unkown, we must first recognize that the unkown is outside of current human knowledge. Therefore, we need a technique that helps us to think outside of human knowledge.

A technique I like for this purpose is "relax the assumption". This technique is based on the bias we have all developed in our thinking and problem solving. The technique focuses on identifying and relaxing a key assumption in a problem in order to develop a solution, e.g. the laptop relaxed the desk assumption. However, this technique only helps in planning if we know what to think about.

The topics to think about for business planning are:   

1. economy
2. regulatory
3. competition
4. market
5. technology

Admittedly pretty obvious in hindsight. The hard part is to identify what assumptions to change for each of these five factors. Drumroll!! Focus on the key parts of the business model and relax assumptions about pricing, sales and distribution as they relate to each of the five factors. For example, the current discussions in Europe about no charge for roaming on cellular phones might have surfaced if one relaxed the pricing assumption during the consideration of regulatory. Amazon would have possibly shown up if one relaxed the store assumption (distribution) in a market or competition analysis for booksellers.

Now that we understand how to find the unkown, please keep an eye out for the next Google :) Also, remember that identifying the problem is the hard part. The solution is easy. If you forgot, read this post.

 

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Thank you HBS

A lot of students ask me what business school they should attend. If they think they have a shot at a top ten school I recommend Stanford, MIT, Harvard, Columbia and Wharton. For entrepreneurship I recommend Stanford and MIT. For students interested in finance, despite my efforts to change their career direction, I recommend Wharton and Columbia. 

After the school selection question, everybody asks for advice on their application essays. Application essays require a lot of work for the student and anyone advising them. Recently HBS announced that an application only requires one essay and that one is optional. Hopefully this change will be adopted by all the top 10 schools.

Thank you HBS on behalf of everyone who advises students on their application essays.

I found this story on Linked In News.

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Customer Experience: The Evolution of Design

For some time I have been trying to understand why design firms are taking over responsibility for branding, advertising and communications for new products. All the top design firms (Ideo, Frog Design, Fuse Project, etc.) are startegically moving in this direction and having success. This blurb from the Frog Design website illustrates the point.

 

Thinking on product development and design has evolved over time. I believe it has gone through the three stages below:

1. Product/service--focus on product/ service features
2. Customer need--think about what problem the customer needs to solve
3. Customer experience--consider all the different ways the customer can interact with a product or company, including social media, in order to profoundly understand the customer--what some call empathizing

While social media and the increase in available information is a fact, why did the best design firms need to so significantly expand their services into full fledged marketing type firms? A story on BBC News Business,"How to market your app yourself and take it front page" provides some insight. The following quote provides the necessary background:

"There are more than 800,000 apps currently on sale on both the iTunes App Store (for iOS) and the Google Play store, the two biggest marketplaces. It's estimated that 56bn smartphone apps will be downloaded in 2013. Yet overall, just 25 developers share 50% of app revenues, with 1 in 4 apps downloaded, used once and discarded. 67% of developers earn less than $500 a month from their apps."

In an intensely competitive market such as apps, marketing, messaging, branding and customer experience are all more important than product features or coding. The challenge is to get awareness for the product in a market of 800,000 competitors. Building the product to be a consistent customer experience is the reason that design firms are taking over "marketing" to insure their designs are commercially successful and their clients achieve their objectives.

Yes, product features are still important, but a great customer experience can overcome a less than perfect design or an early launch product with less than a complete feature set. Given the popularity of apps, customers are coming to expect a rich customer experience for products and services other than apps. All of that social media and other information can influence tires as much as apps.

If this customer experience approach to design appeals to you, I have worked with Fuse Project. They have a very integrated approach to design that defines a customer experience for a product or service.

For those long time readers who know of my views on marketing, do not be confused. This is a post on design and product development :) I have used this design approach with two clients in the last year and it is very effective.

This quote is from the first Related Article below.

"Most interesting change I observe in relation to customer experience today is how much of an importance it is growing in terms of the core business. As consumers’ relationship towards brands is now shifting more in favor of emotional (brand passion) and empirical(authentic experiences) levels of consumption rather than that of a mere utility, customer experience is becoming a significant, and with truly successful brands even dominant part of consumers activation."

The Related Article below on Design Thinking provides good background on the evolution of "design thinking".

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Pattern Recognition

I am not much of a game player, except for an interest in Texas Hold'em. I believe that computer games offer a new way to improve children's learning, but it is not an area that interests me. A recent article in Wired, "How an Entirely New, Autistic Way of Thinking Powers Silicon Valley" got me thinking about Go and chess, two of the oldest and most popular games in the world. Go was developed in China in the 4th century BC and chess was invented in India in the 6th century. Why have these games been so popular for so long.

Both Go and chess are widely admired as complex strategy games, which in part explains their popularity. However, it may be that the popularity of both games is also because they develop a different way of thinking--paternicity or pattern recognition. Patern recognition may be a third way of thinking, in addition to visual and verbal. The Wired article states:

"For a century now, chess has been the petri dish of choice for cognitive scientists. What makes a chess master a chess master? Definitely not words. But not pictures, either (which is what you might think). When a chess master looks at the board, she doesn’t see every game she’s ever played and then find the move that matches the move from a game she played three or five or twenty years earlier or from a nineteenth-century chess match that she’s studied closely. The stereotype of a chess grand master is someone who can think many moves ahead. And certainly, many chess players do strategize that way. But the grand masters retrieve from their memories not more possibilities but better possibilities because they are better at recognizing and retaining patterns or what cognitive scientists call chunks."

While everybody uses visual, verbal and pattern recognition ways of thinking, certain disciplines generally require a particular way of thinking. For example, pattern recognition is widely used in mathematics, engineering and certain sciences. Pattern recognition is also an important skill in programming, as the Wired article explains.

John Von Neumann, the great 20th century mathematician, said that chess was "trivial" because at any point in a game one could identify all the remaining moves in a game (with enough computing power). Watson, the IBM computer that beat the world chess champion in 1997, perhaps proved Von Neumann correct. However, in this case the computer was programmed to utilize a Von Neumann type strategy and not pattern recognition. Never the less, Chess remains widely popular, and approached correctly, can develop pattern recognition skills. Go offers the same way to improve one's thinking.

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The Disruption of Professional Services

A theme which I have discussed many times is that the expansion of IT and the information it produces will have a profound effect on jobs in the future. The jobs to be affected are not just factory type jobs. 

A new study by the McKinsey Global Institute, “Disruptive technologies: Advances that will transform life, business and the global economy”, addresses this issue. For example, McKinsey believes that 8 technologies will disrupt jobs and industries. Cloud computing could disrupt the global IT enterprise industry with $3 trillion in annual spending and million of jobs. Another example cited by McKinsey is autonomous or driverless transportation, which could eliminate millions of jobs. Imagine that the driverless truck shows up at the receiving dock and robots unload the truck.

Kevin Kelly writing in Wired states:

"It may be hard to believe, but before the end of this century, 70 percent of today’s occupations will likewise be replaced by automation". 

One might ponder a future where one's ability to work well with robots is an important skill :)

The area that interests me is "information workers" such as lawyers and accountants. For such professions, I think the future presents in large part the same disrupted outlook. In an Economist article, "Schumpeter: The Age of Smart Machines", they state:

"Knowledge-intensive industries will also have to rethink cherished practices. For a start, in an age in which information and processing power are ubiquitous, they will have to become less like guilds, whose reflexes are to regulate supply and restrict competition, and more like mass-market businesses, whose instinct is to maximise the customer base. Innovation will disrupt many areas of skilled work that have so far had it easy." 

"Guilds whose reflexes are to regulate supply and restrict competition" sounds a lot like lawyers and accountants. In several ways the current value of accountants and lawyers is tied to their licenses and not to their output, which in many cases is widely available on the web or soon will be. The question I ponder is what the 50,000 new graduates from law school each year will do, particularly given the 1.24 million lawyers already in practice in the U.S. I think accountants (and doctors) are in the same situation.

Previous posts on the future of professional services include "AI May Replace Your Job", "New Business Idea--SEC Wikis" and "The Future of Professional Services" from August 2010.

The Answer is Easy

The Good blog has a video posted (below) of Peter Norvig talking about online learning at this year's Google I/O conference. Norvig is well known for his online course in computer science that attracted 160,000 students. He is also an AI expert who heads Google's search quality unit and a professor at Stanford.

About 13 minutes into the video, Norvig makes the comment that "the answer is easy" (...search on Google), "the interesting part is what was the question". My own variation on this is "the answer is easy, understanding the problem is the hard part". Many people define science as the determination of what we do not know. The pursuit of science is to answer the unanswered questions.

With the continuing increase in information and access to it, answers become less important. As I try to teach my students, what is interesting is what is currently outside the scope of human knowledge. Unfortunately most of us have been trained to focus on what is already known.

Norvig also has interesting comments on how to make online courses more effective and how to improve learning in general (minute 18). Norvig also comments on Nobel Prize winner Herb Simon and his thoughts on learning.  

 

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Google Discovers Lessons from the Military

There is a very interesting post about the changes in the hiring practices at Google on iDoneThis Blog. According to the post, Google is moving away from its reliance on test scores and credentials (attendance at top universities, e.g. MIT, Stanford). The People Analytics Department analyzed data on successful Googlers and found that the most innovative workers have two characteristics:

1. Strong sense of mission
2. Desire for autonomy

The U.S. military has a well developed concept of leadership, where everyone is taught the following priorities:

• Mission
• People (subordinates)
• Self

The U.S. military also operates on a philosophy where command is delegated down to the lowest level, in contrast to other military systems (Russia) where command is highly centralized. For example, sargeants in the U.S. military are taught "in the absence of orders, take initiative". Despite common misconceptions, the U.S. military has always advocated autonomy.

While data analysis is a great discipline, perhaps Google needs more veterans. More on the military philosophy is in this post "The Eight Commandments of Management".

Image credit: collagemuseum.blogspot.com

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How to Improve Social Outcomes

The Wall Street Journal has an interesting article, "The New Science of Giving", that focuses on the philanthrophy of Houston couple Laura and John Arnold. John Arnold is a former hedge fund operator who accumulated a fortune estimated at $4 billion and who now devotes himself to philanthropy. The difference is in the approach to philanthropy, which is illustrated with the quotes below. (The Foundation website is at http://www.arnoldfoundation.org/front.

The foundation's approach is to "focus on systemic problems without easy answers ". The Arnold's define this focus as "public-policy problems that led to ... "moral inefficiencies". Their methodology is to "spend a lot of time doing research and evaluating data, and then make a handful of big bets, even if they involve considerable risk" (similar to well run hedge funds). Areas of particular interest are K-12 education and the U.S. justice system. 

What I like about the Arnold approach is the following:

1. Focus on the really big problems (the only one's worth working on)
2. Use a data driven, analytical approach to develop new solutions (don't follow the philanthropy crowd)
3. Focus on the project results and their measurement
4. Set aside the "feel good" part of philanthropy and look at the results produced

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10 Fun Books for Entrepreneurs

It's rare when I find a list of books on entrepreneurship or business where several of the books I have read and found worth reading. Inc. magazine has a new list out, "10 Eye-Opening Books Every Entrepreneur Should Read". These books are not academic type books like Jim Collins or Clayton Christensen write but rather more practical and perhaps easier to understand. 

I have read 6-10 and 1 on the list. Great vacation reading. My most recent post on books to read is "Summer Reading-Entrepreneurship, Design and Thinking" and all the other posts on books are here.