SOPHISTICATED FINANCE

Avoiding a U.S. Default

I was writing a post on Mexico, which will come out next week. This writing prompted me to recall a situation during the Clinton Administration where Mexico was about to default its debt and the U.S. Congress was deadlocked and unwilling to help Mexico. Robert Rubin, then Secretary of the Treasury and former CEO of Goldman Sachs, devised an elegant solution by finding an Executive Branch authority to lend money to Mexico. In this congressional deadlock Ruben found a way to avoid congressional approval.

Now I do not think we can find an Executive Branch authority to raise the debt ceiling, although I hope someone examined this possibility (perhaps declaring war on Iraq?). However, there may be some possibilities to postpone the default and thereby give Washington more time to find a compromise. I recognize that time is short but this is my idea:

The Executive Branch could ask for U.S. Government loans to be prepaid, such as foreign aid loans which total about $20 billion, and any other type of loans. I am not expecting full repayment but we might raise $50 billion quickly. Alternatively, perhaps the Executive Branch could repo such loans to the big banks it bailed out in 2008. An outright sale might require congressional approval, but repos might slip by the existing law.

Now the current Secretary of the Treasury, Tim Geithner, was an Under Secretary under Rubin, so hopefully he remembers Rubin's elegant solution. However, he might be distracted by the politics, as everyone in Washington appears to be. I do not actually think there will be a default, but hopefully the Executive Branch has a back up plan.

This has been a comparatively even handed post on a controversial subject, but I cannot fully control my feelings on the subject. There is an old saying that goes something like this "if there is a problem, shoot all the lawyers". If you substitute "Washington politicians" for lawyers my sentiments on the U.S. Government defaulting would be captured very accurately.

Note: The story below from ABC News suggests some other people are thinking about a solution involing Executive Branch authority.

 

 

Related articles

• Last-Ditch 14th Amendment Plan Gains Momentum As Debt Clock Ticks (blogs.abcnews.com)
• Top bankers urge Obama, Congress to reach deal (seattletimes.nwsource.com)

Floating University

I have done quite a lot of workshops in the last year. I seem to be becoming a specialist in distilling large subjects down to a very manageable size. I have a 3-day MBA workshop, a 2-day finance and accounting workshop for non-finance types and yesterday I did a 3 hour lecture on entrepreneurship which included everything except the financial modeling and capital raising parts. I like these short format presentations because the subject is boiled down to its essence, which suggests to me that much of formal education could be done more efficiently.

This post from The Chronicle of Higher Education highlights a for-profit project called Floating University. A collaboration of Harvard, Yale and Bard, Floating University plans to offer an entire undergraduate program in 14 video lectures on "big ideas". While positioned as a single course, at a cost of $500, I think it is another example of education moving toward more efficient approaches.

French Internet Pioneer Closing

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The Wall Street Journal is reporting that France Telecom will shut down Minitel. Minitel was one of the first videotext services (and the largest operator) that allowed users to access computers through telephone lines and a dumb terminal. The text only, four color service provided consumer information. Minitel was the forerunner to Compuserve, AOL and the Internet.

Minitel was established by President Francois Mitterand, who arguably was one of the most visionary public officials in the telecommunications and computer-based information area. In the early 1980s Mitterand also launched a project to develop the first online learning program to educate French children. He hired Nicholas Negroponte to run the project.

I invested in a competitor to Minitel. The investment did not work out and I let my interest in online access to computer information eventually wane. I had seen the Internet well ahead of its popularity but I could not put the pieces together. Someday I will tell the story of how I missed the Transformer toy opportunity.

Articles on Entrepreneurship Updated

Image by Wolfram Burner via Flickr

Just a reminder that this archive of articles on entrepreneurship is updated frequently. The original post and the link to the archive are below. Recently the articles have been on strategy and the customer value proposition.

"I have shared the articles here that I send to my entrepreneurship students during the semester. Will add articles during the remainder of the semester and in future semesters. The mix is mostly blog posts and videos. Naturally it is a bit eclectic and reflects my interest in design as a model for innovation, social entrepreneurship and venture capital amongst other topics.

I used Evernote to make the articles available. Evernote is excellent for organizing large amounts of information."

 

Internet Facts

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Business Insider had a very interesting article about Roger McNamee, a Partner at VC firm Elevation Partners and an investor in Facebook. McNamee stated that the era of social media is over and that everything in this space is now just a feature and not a business. I agree with this conclusion but what I found more interesting are these three statements from McNamee:

1. "Microsoft's share of internet-connected devices has gone from 95% to under 50% in 3 years." Would someone please explain to me why anybody needs to be trained in Windows to have computer literacy, particularly given that Windows share is only going to decline further as more operating systems appear (in China).
2. "Google only has 50% of the Internet searches" when you consider all the specialized search services, such as Realtor.com, Wolfram Alpha, etc. I have been making the point about the opportunity in vertical market search for some time. 
3. "The fact that most people now have more than one device means the cloud is vital, because you want to have all your stuff on all your devices. (It also means the old PC paradigm is dead, because the old PC paradigm means everything stored on one device, instead of everything in the cloud synced to many devices.)" This is why Dropbox has such a tremendous future. They understood the idea of multi-device information availability and developed a great interface and feature set. Now if everybody would use Dropbox I would not receive anymore email stuffing Powerpoints.

Related articles

• Wolfram|Alpha Language-Based Search Engine Knows 'Shaft' Theme (techland.time.com)
• Will Facebook Survive the Future of the Internet (Sophisticated Finance)
• Operating Systems Go Local (Sophisticated Finance)

FIU Business Plan Development Workshop

This Friday, July 29,I will be doing a workshop for the Pino Entrepreneurship Center at FIU in Miami. The workshop deals with developing a business concept and a business model. The section on the customer value proposition has been greatly expanded. I also discuss a good outline for a business plan that comes from Sequoia Capital, one of the leading U.S. Venture capital firms.

More information on the workshop and registration information is here.  The nominal fee goes to Pino. My next Pino workshop will probably not be until the fall.

Information Theory and U.S. Competitiveness

Someone asked me recently what I thought was the key to the U.S. remaining competitive in the 21st century. The standard answer is creativity, innovation and collaboration. What I said was:

The U.S. needs to develop better systems to collect and analyze real time information and to develop organization structures that delegate management decision making authority to those who need to respond to this information. 

(A previous post on this theme is here.)

It has long been rumored that Google can forecast stock prices based on search results and their trends. I have no doubt that this is true or it should be true. This is a perfect example of what I mean by collecting and analyzing real time information. The Indian student who posted information on Twitter about five doctors after the most recent bombing there is perhaps an easier example to understand. 

Recorded Future is a company that is participating in this space. Their slogan is "unlock the predictive power of the Web." To quote from a recent Recorded Future blog post:

"Being able to detect events early, or even before they occur, can carry substantial value, some times in the form of significant financial gain, other times in the ability to save lives, or even in providing the opportunity to change the nature of what is to happen.

As the world has moved into an always-on, real-time mode, traditional methods of “news”, i.e. the morning delivered printed newspaper or even the hourly newscast, have been overtaken in their ability to provide early indications of what is happening by information traveling rapidly through media such as Email, SMS, Twitter, Facebook updates, etc.

The increased speed of delivery and accessibility to news creates opportunities to better understand developing scenarios even as the growing volume of content creates challenges in sifting, filtering and identifying actionable information about the future."

The volume of digital information is doubling every two years. This rate may even increase as more and more Internet connected sensors are deployed. Whoever best collects and analyzes this data flow will have a strategic advantage. Whoever adopts an authority structure to act on this information will win in social, political and economic terms.

This post was inspired in part by this story on ReadWriteWeb.

 

 

Books I Have Been Reading

I have been traveling alot recently and therefore reading more. I generally read books in four broad categories:

1. Entrepreneurship
2. Geo-politics
3. Economic Development
4. Neuroscience/education

The books I have been reading include:

• Disrupting Class by Clayton Christensen    The HBS professor applies his disruptive innovation model to American schools. I recommend it to anyone interested in understanding the role of computers in education.
• Hackers and Painters by Phil Graham    The founder of Y Combinator talks about computing, coding and startups. Good enough for my entrepreneurship class.
• Monsoon by Robert D. Kaplan    This book explores the emerging importance of the Indian Ocean and traces the history for its importance
• What Science Offers the Humanities by Edward G. Slingerland   Every humanities professor should read this book
• The Next Convergence by Michael Spence    The Nobel Prize winner talks about the future of economic development

Image credit: growabrain.typepad.com

ABDI Presentation on the Future of Brazil

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A friend sent me a presentation by Dr. Roberto dos Reis Alvarez of ABDI on "Innovation and Development in Brazil". ABDI is part of the Brazilian Ministry of Industrial Development. The presentation outlines a justifiably glowing picture of Brazil's future and focuses on six themes:

1. Brazil has scale in terms of population
2. Brazil has a large middle class
3. Brazil has achieved social inclusion
4. Brazil has large domestic and foreign sources of committed capital
5. Brazil has intellectual capital
6. Brazil has a documented record of world class innovation in technology
7. Brazil has an integrated strategy for energy and alternative energy

I have no issue with this presentation. Every term I tell my students that if they do not want to move to China they should move to Brazil. Click on the following link to download the presentation (most of which is in English).  Download Brazil ABDI Presentation 2011

USEM Mexico UNIAPAC

This week I spoke in Mexico City in Spanish about One Laptop per Child to USEM (Spanish link; English link). USEM is an organization of business owners that use Christian principles for social good and has 26 chapters throughout Mexico. The members support a wide range of social projects related to children, family, education, entrepreneurship and the environment. It is especially enjoyable to speak to like minded people and I would like to thank USEM for the opportunity to speak to their members.

The members of USEM recognize that to achieve social change there are three requirements:

1. the will to make a meaningful change
2. the capital to carry out the program
3. the scale to make a significant difference

Implicit in my three requirements for social change is a recognition by USEM that the private sector cannot wait for the government to address all the social issues.

USEM is the Mexico branch of Uniapac, a worldwide organization of business owners in 25 countries devoted to social change through Christian principles.

 

Wireless Industry Following Classic Strategic Direction

When I was a youngster starting to learn about strategy I read an article from McKinsey that said that only 2-3 companies in an industry can be truly profitable. I never saw any empirical analysis to support the conclusion, but intuitively it always made sense. 

The FCC has just released a report on state of the U.S. wireless industry thru 2009, and the report confirms McKinsey's conclusion. See the chart below. Only Verizon and AT&T have excellent EBITDA margins. Sprint and T-Mobile have poor margins by the standards of the telecom industry. Not surprising, T-Mobile is being acquired and Sprint should not be far behind. Neither company has much chance to reach the levels of profitability of its competitors and establish the internally generated cash flow to invest in the future technology required by the market.

 

The chart and the original story I found at Fierce Wireless. Some other good data and charts in the original story. 

 

Related articles

• FCC report finds 89 pct of Americans have wireless service (digitaltrends.com)
• FCC stays neutral on the state of U.S. wireless competition (news.consumerreports.org)

Cisco "Police State" Project in China

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Much reporting has recently covered Cisco's new project to provide hardware to monitor streets and public spaces in the Chinese city of Chongquing. Chongquing is one of five large cities in China adminstered directly by the federal government and has a population of over 30 million. (We all need to brush up on our Chinese geography.)

What I find ironic in the reporting of this "police state" project is the following:

1. While the press typically criticizes the Chinese government for awarding contracts to local suppliers such as Huawei, no one is commending the government for selecting a foreign supplier.
2.  Given that Huawei is closely tied to the Chinese military, it is interesting to me that a foreign supplier is used for a surveillance project; I doubt that it was a question of the quality of the hardware and more likely based on internal Chinese politics. (Huawei is the leading competitor to Cisco in China.) 
3. Every major city in the developed world is under 24 hour camera surveillance in an effort to thwart terrorism; I guess Chongquing is just joining the list of other police states in Miami, Tokyo and London. 

This is the new world we live in. Calling one particular project a police state just points out the bias of U.S.-based reporting.

Related articles

• Thoughts on China Sophisticated Finance
• Thoughts on China--Social Media Sophisticated Finance

What Engineers Need to Know about Business

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I spent a day in Los Angeles last week with an engineer who founded and sold a successful high tech company. He now devotes himself full-time to philanthropy for children and engineering education. In preparation for my fall course in entrepreneurship for graduate level engineers, I asked him what were the most important points that engineers did not understand about entrepreneurship. He said engineers needed to understand two points.

1. Products need to be matched to customer needs. Engineers are trained to focus on designing and developing products. They need to realize that a more profound understanding of the customer and their motivations leads to better products that are more saleable.
2. Focus on the value exchange. Engineers tend to ignore the pricing of a product and the sales process. Most important thing is to find out if anyone will buy the product and at what price.

He also strongly recommended launching products with a limited feature set rather than perfecting the feature set initially. He said it always takes longer than planned to complete the new features and that you risk the market moving away from you (with a competitor) if you are not in the market.

Last point. He described himself as a salesman and not an engineer.

Related articles

• Roundtable on Engineering Entrepreneurship Research (kauffman.org)
• The Lean LaunchPad at Stanford - The Final Presentations (xconomy.com)

Operating Systems Go Local

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Alibaba, a diversified Chinese Internet services company, is developing its own operating system to compete with Google's Android. I like this idea better than Baidu's plan to develop its own version of an Android operating system. (Baidu is the search leader in the Chinese market.) By developing its own technology Alibaba controls the pace and direction of the development of the OS.

I think this will be just the start of a trend by large Internet services companies in India, Russia and maybe Brazil to develop operating systems that optimize their Internet services. If Intel and HP can develop their own operating systems, anybody can do it.

This trend will also increase the workload for applications that have international appeal given that the apps may have to support many more operating systems. This extra burden could slow down the international expansion of popular apps that are resident on the device and could be another factor leading to more cloud-based apps.

This story was inspired by a post on TNW.

 

Related articles

• Alibaba's Upcoming Mobile Operating System? (siliconhutong.com)

Accounting and Finance Workshop

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I just presented a two day workshop called "Accounting and Finance for Non-financial Managers" for a large international company. The workshop focuses on theoretical concepts in micro-economics, finance and accounting and the practical application of the concepts to business management and decision making.

The client wanted the workshop to focus on the analysis of new projects using the discounted cash flow methodology. What was particularly interesting is that the company shared their own discounted cash flow template for project analysis. Every CFO makes adjustments to such a template to achieve certain strategic or risk management objectives. When I was CFO of the Indonesian company I added seven percent to the actual weighted average cost of capital discount factor to reflect the uncertainty of the operating environment. The differences between the client template and the theoretical model for discounted cash flow gave me quite a lot of insight into the strategy of the company. I would like to illustrate this point more fully but I would be violating my non-disclosure agreement with the client. One point worth noting is that the next time you do due diligence on a large acquisition ask to see their capital expenditure evaluation template. May give you some real insights into how they think about the business.

If you are interested in refreshing your knowledge of theoretical finance and valuation, Aswath Damodaran, a professor at the Stern School at NYU, has a terrific website here. What could be more fun on this 4th of July weekend than reading about beta and weighted average cost of capital. Enjoy the weekend even if you don't do any finance.