SOPHISTICATED FINANCE

Frog Design

Good product design is probably the successful combination of meeting customer needs, physical and engineering constraints and aesthetics. The process which brings these three variables together fascinates me, in part because of its critical importance to entrepreneurship--whether it be a product, a website or a user manual Good design also makes the world a better place and it always reminds me that genius exists.

One of the best design firms in the world is Frog Design, which was founded by Helmut Esslinger (who I wrote about here). Frog is perhaps most famous for their design work on early Apple products. The Frog blog, design mind, is an eclectic collection of posts on a wide range of subjects. When they discuss new products and the fundamentals of design I think it is akin to sitting with Buddha or Aristotle and listening to them lecture.

Today's design mind post, Touchfrastructure Meets the HypePad, is a new take on understanding the iPad (which Frog did not design). In summary, they believe that the iPad is a service and not a product. This notion gives a whole new slant to how computing may evolve. I thnk it is consistent with my view that computing is becoming an appliance industry (see yesterday's post) but the definition of an appliance may need further thought.

Lessons From the Kindle

I will admit that I am fascinated by the Kindle, not so much as a book reader but more as a computer. I am looking forward to see where Jeff Bezos, the CEO of Amazon, and his developers will take this device. An article this weekend by Jay Yarow of Business Insider on the Kindle and the iPad got me thinking about the subject again. The article references Mark Mahaney, a Citibank equity analyst, who follows Amazon.

Yarow/Mahaney make three good points.

1. The iPad will help Kindle by creating a larger e-book reader market, in which Kindle's share will lead to greater sales than today. Kindle's 70 percent share of the current market will decline, in part due to the iPad, but iPad and the 12 other new entrants will promote and make the market grow to a substantial size.
2. The Kindle provides a more limited feature set than the iPad at a substantially lower price, which means that it should attract a very different customer than the iPad.
3. Amazon is developing a new version of the Kindle that may provide a better web browsing experience and the checking of email. The Kindle is becoming a computing device, which I discussed in February.

Some additional thoughts are worth mentioning.

1. The computer market has always been competitive yet everybody (Dell, Lenovo, Acer, HP, etc.) makes money by differentiating their products by features and price point to appeal to a different customer segment. Kindle is just another example of this strategy.
2. The computer market is becoming what I call an appliance market, where specific purpose machines are built to serve niche markets. The GPS, iPod and the Kindle are obvious examples. This trend will continue as more manufacturers build machines where the hardware and software are tightly integrated (like in the MacBook) and generic providers like MS Windows and Intel become less popular.
3. As the computing market moves more and more to appliances, special built ARM processors will become more popular. (A Freescale ARM processor powers the Kindle.)  ARM processors are energy efficient, cheap and more and more frequently being designed to incorporate previously external components in the processor. This design approach is possible because the appliance has a limited purpose and related functionality. This design approach also lowers the cost of the appliance by reducing the number of components. (A previous discussion of ARM processors is here.)

I more and more think that in a few years I will be carrying something like a Kindle as my everyday computer. The weight, form factor and ease of use are just too compelling. It may not be made by Amazon but it's grandfather was a Kindle. If someone would produce a lower cost GSM cellular modem, it might even be my phone.

Featured Reader WWD: Robert Hacker

If you have ever had an interest to know a little bit more about me, I was recently profiled on Web Worker Daily. Many thanks to Simon Mackie, who writes the featured reader section.

WWD is one of the most popular blogs on the Internet and I have been reading it for about 5-6 years. This blog covers productivity, apps and other topics of interest to people that live and work on the web. Exceptional coverage of Apple and Google, two subjects of particular interest to me--as you will see in the profile. You will also discover why I have so much interest in social entrepreneurship.

Passion, Reason and Entrepreneurship

If one were to pick the most common characteristics of successful entrepreneurs, passion and analytical skills would be on everybody's list. Passion provides the drive to become a subject matter expert and to overcome obstacles. Analytical skills provide the in-depth reasoning abilities that produce the profound knowledge of the customer and the market. Of course, reaching a proper balance between the two qualities is the real challenge.

John Hagel has a very good essay today on his blog, Edge Perspectives, on passion and reason, which everybody should read. My previous posts on passion are here and here. 32 previous posts reference "analysis" according to Lijit Search.

Seed Fund for Social Entrepreneurship-First Light Ventures

I always tell start ups and early stage companies in Florida to go to Atlanta for their capital. There is a large community of venture capital and private equity firms that finance all stages of development in a wide range of industry sectors. Today in Tech Drawl, a blog that covers the Atlanta VC/tech community (and does a great job), there is a story by the Founder of First Light Ventures.

I have written before about venture investment in social entrepreneurship (here), but I believe First Light is the first venture fund devoted to social entrepreneurship. Their focus on seed round funding makes them especially attractive. Perhaps the most important point about First Light is that they are further evidence that social entrepreneurship and venture capital can combine to generate appropriate investor returns and social good.

Your Next Computer

Lately I have been learning a lot about the design of computers. I am talking about the trade offs between different processors, BIOS configuation and the different classes of flash memory. I have also learned about the electricity consumption of different computer components. This has led me to the following conclusions about the next generation of computers.

1. The next generation of computers will use ARM processors, such as those made by Marvell. ARM processors were originally developed by Motorola for cellular phones but now power a much wider range of devices. One advantage of ARM processors is low energy consumption and the resultant longer battery life
2. The memory in the computer will be 2-8 GB of flash memory (NAND) with almost all data storage done on cloud devices. Flash memory means no movable parts (less breaking) and no need for a fan to cool the machine. No hard drive and fan will put the weight at 2 pounds or less. (This size memory will preclude Windows 7, which requires much more memory.)
3. The operating system will be LINUX because it is open source (cheap) and requires very little NAND storage.
4. RAM will be as small as 512 KB; most users do not need to pay for more and this size will keep the price down.

To imagine this computer think of the Kindle (discussed here) on steroids with a screen about the twice the current size (similar to the first computer screens on MS-DOS machines). Why will computing move this way? When users see these machines they will realize that the user experience is perfectly satisfactory and they have been paying for over built computers for years. With the user interface development in LINUX, you will not even have to learn much, if anything, about LINUX.

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Mezzanine Debt for Tough Times

In reviewing the searches that bring readers to this blog, I have noticed an increased interest in mezzanine debt. I wrote about "mezz" in one of my earliest posts and that post ranks high in the Google results. Now the increase in searches could just be a few college professors asking for a paper on mezzanine debt, but I prefer to think that as the economic crisis continues more and more businesses are looking at new alternatives for financing.

Throughout the crisis, capital availability through mezzanine debt and equity has been much greater than any of the senior debt alternatives. The reasons for the greater availability of mezz and equity are several.

1. These types of financing price in higher returns, which makes it easier to take on the higher risks associated with the economic crisis.
2. Mezzanine debt and equity to a lesser extent has always been characterized by a flexibility to match the unique cash flow requirements of the borrower/company, which again helps in the current situation
3. Mezz and equity investors are not concerned with collateral for their financing, which gives them much more flexibility than a commercial bank or a  factor

The flexibility in mezz terms, the long repayment schedules and the sophistication of the lenders make this alternative attractive in good times and especially in difficult market conditions.

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Response to Sramana Mitra of Forbes

In the February 26 issue of Forbes I was quoted in a story by Sramana Mitra. Suffice it to say that Ms. Mitra and I disagree on certain matters related to entrepreneurship.

The story begins when a Twitter friend, @mylifeandart, asks me to read Ms. Mitra's blog and comment on a post about bootstrapping. I disagree with Mitra's position that bootstrapping is the way to build a company and state that it basically only works for capital efficient business models with high margins. We exchange more comments on the blog and continue to disagree. Ms. Mitra excerpted my comments from the blog and included them in her February Forbes article, citing me as an example of "academia's dismissive attitude toward bootstrapping". While I think it is a bit odd to draw a conclusion about academia from one professor's comments on a blog, I do not think that bootstrapping is the recommended way to approach building a business.

I would define bootstrapping as the use of personal financial resources and internally generated cash to grow a business. Bootstrapping a business to any significant size requires such a unique set of circumstances in terms of margins, trade finance and low capital expenditure that I do not think it is an advisable model for most businesses. Furthermore, relying on internally generated cash and creative cash generating techniques (such as licensing) usually constrains the ability of the company to pursue market opportunities and grow revenue. I teach my students the following priorities:

1. Grow revenues
2. Reach cash flow positive
3. Achieve profitability.

For this approach to work, I stress that the company cannot run out of cash. I encourage them to use outside financing in all forms--not just venture capital. Good business concepts can raise capital even in tough times, despite Ms Mitra's views to the contrary.

I built a $1 billion revenue company (from $40 million) in seven years and I borrowed $300 million to execute that strategy. Setting aside the mythical attractiveness of bootstrapping, I think capital raising is a better way to grow a company. Yes-I raise capital for a living, but the U.S. was built in large part because of the development of its capital markets. Use them! Many more large companies have been built with outside capital than through bootstrapping.

If you would like to read an article by a writer who appears to like my ideas, please read Nancy Dahlberg's story in the February 28 Miami Herald. Big week for me in terms of press coverage--2 mentions by leading publications. Any writer seeking quotes or an interview can reach me by email by clicking on the "contact" tab below the Sophisticated Finance banner above or on Skype--rhhfla.

Ms. Mitra please feel free to leave a comment below or continue the debate in Forbes.

Venture Capitalists Should Study Philosophy

One of the riddles studied in philosophy is "in the land of the blind, the one eyed man is king". In such a place perhaps 50 percent of the people would not even know that sight existed, 40 percent would think one eye was required to see and maybe one percent would consider the concept of two eyed people (or more eyes). In other words the nature of the information can shape reality but that does not make it true (the inductive fallacy).

The recent rash of VC blog posts in response to Vivek Wadhwa's post on Tech Crunch about entrepreneurship being learned (discussed in my post here) demonstrates the VCs' need to study more philosophy. The VCs almost unanimously conclude that entrepreneurs are born. What they overlook is that their sample of entrepreneurs is almost entirely people who make funding requests to VCs (the one percent). Many entrepreneurs never use other people's money (OPM) and those that use outside financing typically go to banks, factors and leasing companies. In other words the VCs are assuming that their data is representative of all entrepreneurs and in fact it is not. They appear to be overlooking all the entrepreneurs who never go to VCs. Entrepreneurship can be learned :)

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Entrepreneurship Can Be Learned

I spend a considerable part of my time teaching entrepreneurship in classes at FIU and in workshops. Obviously, I believe entrepreneurship can be learned. Very good article on Tech Crunch provides the proof. The article was written by Vivek Wadhwa, shown above. This is the third research piece on entrepreneurship by Mr. Wadhwa that I have read and his research articles on entrepreneurship are excellent. Read the full article.

I found the article through a tweet by @finance30. Finance 3.0 is an excellent finance site (where I am an advisor).

Image credit: Tech Crunch