SOPHISTICATED FINANCE

Have we just started the next financial crisis?

"Wednesday marked a historic milestone in the future of early stage investment and funding for innovation. Roughly 60 days from now, over 200 million Americans will have the option to be angel investors."  LawGives.net March 27, 2015 

Several Presidents have promoted home ownership despite no constitutional requirement. Most notable was Bill Clinton and we know how well that turned out. Now the SEC has changed the law to permit greater participation in equity crowd funding. Some estimate that 200 million Americans are now eligible to invest. The law was changed ostensibly to permit a larger number of investors to buy shares early in sexy pre-IPO companies like Google, Amazon and Facebook. Probably a popular populous idea. Again, there is no constitutional requirement for such investment rights.

The question I would ask is how many of my fellow Americans are financially literate enough to evaluate early stage companies. Based on returns, only about 10 percent of venture capitalists generate returns consistent with the risk and these are full-time professional investors. On a good day maybe 5 percent of Americans or 10 million of the 200 million are sufficiently literate financially to pick startups. Looks like we are following in the footsteps of Bill Clinton and about to start building toward a huge snafu again, promoting investments that were not prudent for the investors.

I don't object to permitting individual investment  in early stage companies or crowd funding. I just do not believe it is the government's role to promote it. That's why I keep referencing the constitution. Looks to me that every time the government starts a populous investment program not required by the constitution, we have huge financial problems. 

What could be the the crisis? My biggest concern is the huge amounts of money that normally go into the stock market or bank deposits could now be tied up in illiquid equity investments of uncertain value. Every investor has the right to make their own decisions. I just do not like the government promoting investments that are imprudent for many. 

Related articles

Did The SEC Just Kill Early Stage Venture Capital?

How Do I Raise Finances for a Business?

Who Owns the Data--RadioShack

"Bankrupt RadioShack wants to sell off user data", reports The Switch today. As you may know RadioShack filed for bankruptcy and appears headed toward a liquidation. One asset proposed for sale is the company's years and years of data on its customers and their contact information. Should make for an interesting case in the Bankruptcy Court as many have come out to challenge RadioShack's (trustee) right to sell the data or to dispute the ownership of certain data.

The takeaway from this story--data has value. Every operating company should have a policy to review the sale of data every five years (or shorter) as a part of a new business development or business model innovation program. A directory of the different types of data collected and the years captured might be an easy way to start. Every company collects data, but I think few have a sufficient understanding of that data to evaluate the use in a new business opportunity or as a new revenue source for an existing business. Sounds like a whole new branch of consulting may be born.

Related articles

Radioshack wants to auction customers' data

An interesting use of search

Bankrupt RadioShack selling off personal details of 117m customers

Lee Kuan Yew is Dead

The twentieth century history of Southeast Asia is marked by its dictators--Marcos in the Philippines, Ho Chi Minh in Vietnam, Suharto in Indonesia and Lee Kuan Yew in Singapore. They are all gone, leaving democracies in Indonesia and the Philippines and a communist regime in Vietnam.

Probably the most successful and benevolent of the group is Lee Kuan Yew, who died Saturday in Singapore at 91. With an admirable record of economic development that took Singapore from a developing to a developed country,  Lee Kuan Yew governed in a style that combined parts of a centrally-controlled government and a democracy. If there is such a thing, Lee Kuan Yew came as close to a benevolent dictator as history has probably seen.

More details are in this Economist story. 

Related articles

World › Singapore founding father Lee Kuan Yew's condition worsens

Singapore Founding Father Lee Kuan Yew's Condition Worsens

Are We on the Verge of an Organizational Change in Government

I have been reading an interesting book, "How the West Grew Rich", by Nathan Rosenberg and LE Birdzell. One of the interesting points they make is that as organization evolves, commercial activity changes. For example, at various times man has self-organized around clans, tribes, kingdoms, feudalism, city-states, countries and self-governing countries. Commercial changes began probably with barter, progressed through guilds, private companies, public companies and now there are multi-nationals. Whenever there is a significant change in how people are governed, such change permits new commercial activities.

A reader wrote after my post "Would Y Combinator Invest in a Militia" to tell me that democracy was never the intention of the Founding Fathers (they designed a republic). The writer may be correct, but if we follow Rosenberg and Birdzell maybe we are at one of those inflection points where the form of government is going to change again-- from a republic to a true democracy. Technology is definitely available for populous voting in a direct, secure, authentic way where citizens could propose laws and certain levels of popular votes would make them effective. Challenge will be getting the existing government to agree to such changes, which is why we may need to start without their consent. Maybe a small city like where I live could be an example and pass a law based on popular vote. All the citizens could agree to abide by the law. Failure to follow the law would result in social ostracization. 

Many factors tell me that we are on the verge of change in the current form of government in the U.S. For example, new technologies in social media always precede profound social changes, such as a move to democracy. The complete stupidity of the current two party system may suggest that such a system is breaking down. For all the years that I have watched the federal government I cannot remember a period where government was less effective than a period that began with Clinton and continues through Bush to today.

Note: An alternative to democracy as the fundamental organizational change may be a partial return to city-states, as described in this post "City-States and Romer's Idea of Urbanization". Maybe Shanghai or Sao Paulo would be candidates. Another alternative may be private cities.

A Good Twitter Profile

I thought this was a particularly efficient and effective Twitter profile. 

This was the Tweet that prompted Edward.

Related articles

You Can Now Embed Twitter Video On Your Website

Twitter Analytics

Researchers take on Govt to Twitter with #RIPResearch

Would Y Combinator Invest in a Militia

 "To be merely useless, indeed, is perhaps the highest eulogy that can ever justly be bestowed on a regulated company" Adam Smith

Whenever people discuss Uber, the sharing economy comes up. Whenever the method or object of sharing changes, a big business opportunity is created. That's been true for at least 40,000 years. What intrigues me is that Uber is taking over the government controlled taxi market. The government's immediate response in several cases has been to enforce the existing law. However, it may be that what the government is doing is trying to maintain its usefulness. If more companies "disrupt" government regulated industries, eventually we start to question the usefulness or need for government. Lest you think I am completely crazy, there may be some data (on government and not my mental state).

 

An important function of government is what and how it communicates to the citizenry and what is prohibited communication. So if the role of government is to be challenged or changed it may well take place in the communications arena (guns being expensive, dangerous and to some extent outdated). Now for some possible data.

 

Y Combinator is funding a non-profit company in Argentina, DemocracyOS, that offers software for politicians to poll their constituents and has been used there to start a new political party. One of the first users is a serving government official in San Francisco. He is polling constituents on what they think about possible new legislation.

 

When did government ever put the populous view ahead of re-electing standing politicos and serving private interests. However, perhaps  San Francisco is the first case where government is trying to demonstrate usefulness by setting the populous agenda through the Internet, before the people get organized, set the agenda on the Internet and start passing laws without involving the government. The people passing laws without government involvement, that would be truly disruptive. If there were ever politicians who could see such a trend coming it would be politicians in San Francisco and Silicon Valley. (An historical note--when the feudal manor system broke down in medieval Europe, the kings created "relationships" directly with the peasant citizenry. Such an approach eventually failed to preserve the monarchies. Similarities to government polling the citizens are perhaps obvious.)

 

Of course, if the government would just be efficient and commit to serving the needs of 21st and not 19th century citizens, I would hold off on applying to Y Combinator for funding for the Hacker Militia Corporation.

 

Great name but I am going to forego being the first militia applicant to Y Combinator 😎. For an old post making fun of my name, checkout "The Hacker Universal Theory of Management"--HUTM.

 

 

Related articles

How, and Why, Y Combinator Got Serious About Diversity

The Endgame of Communist Rule in China?

Marginal Revolution is one of my favorite blogs. In this post, "The endgame of Communist rule in China?" they take exception to China expert David Shambaugh's recent analysis. Shambaugh believes that communism is failing in China and that the system will change probably in a bloody coup. The author's at Marginal Revolution disagree, but their analysis is not much better than the flawed thinking of Shambaugh.

Having lived through the ouster of the longstanding dictator in Indonesia-Suharto- I have my own analysis. When I worked at OLPC I became a student of dictatorships, a large potential market for the project considering all the countries still controlled by dictators. I discovered a wonderful, unpublicized book called "The Dictator's Handbook", which breaks down how to be a successful, long standing dictator. First rule of being a dictator,  "share the wealth". Spread the wealth far enough to include the necessary parties to maintain your control. Such parties would be the army (with the guns), big business people (they bring projects that require government approvals :) ), select government officials, your family/tribe and a few other miscellaneous souls.

If we analyze China based on the Dictator's Handbook rule, we see the money spread quite widely with many government, military and family members prospering..for several years. Periodic re-shuffling of the government is just a disagreement about who gets the largest share of the wealth, but most beneficiaries are happily not affected. 

The only way that the communists would be pushed out in China is if the military saw their financial well-being at risk or not growing fast enough and changed the government. (It's always about guns and money). In 1998 Suharto was deposed because shooting students was so reprehensible that the populous (including many in the military) was incensed. This anger was going to upset the country more (after an 80% market devaluation of the currency) if not pacified. Suharto stepped down when the military told him to.

Unless the military sees it in their self-interest, I see no way the communist government could be replaced in China.

Note: My obituary post on Suharto is here. Some good advice.

Related articles

China's Communist Party Puts A Halt To Religious Belief | The Readers Bureau

Internet Rights China Targets Muslims, Curbs Freedom of Speech For All: Report

How to Define Social Benefit

Sometimes defining words drives me crazy for years. As yesterday's post might indicate "risk" is one of those words. I really like the concept of equating risk with "variance in cash flow" in business usage.

"Social" is another such word that perplexes and annoys me. I cannot understand why this word should have implied normative value, as in social benefits. Social is derived from "society". Social is a characteristic of a group of people. A group of people is a "society".  So, society is the sum of the individuals.

Ostensibly capitalism allocates the resources to satisfy individuals and their needs. What capitalism cannot allocate resources to, probably because such a thing cannot attract investment capital, might just be a social benefit. For example, no performing arts center can attract investment capital so maybe such a project is a social benefit.

Social benefit looks a lot like a public good. My rather detailed thinking on the subject is in this post, "Public Good". Until further notice, this capitalist is defining "social benefit" as public good.

A Great Point About Startup Risk

I have been thinking a lot about risk recently, in preparation for a course I am thinking to teach on "Assumptions, Risks and Forecasting".

Peter Drucker defined a business as a set of assumptions, where the key task is to know the assumptions. Risk as I define it is "variance in cash flow" and not the traditional economic, government, market and technology risk factors most people think about. Those factors are not risks unless they impact cash flow. One of the benefits of this approach to risk is that one does not obsess about risks such as competitors until one sees their effect on  cash flow in terms of customer attrition, average selling price, repeat purchase rate. However, notice that all the numbers that show the effect of competition are hopefully all on your weekly/monthly KPI dashboard. Effectively, the assumptions captured in the KPIs are the risks. Note that all the "risks" in the business are properly identified at the time the assumptions for the first forecast are prepared.

In "How to Start a Startup CS183B", Marc Andreessen makes an interesting point about risk:

"So you come in and pitch to someone like us. And you say you are raising a B round. And the best way to do that with us is to say I raised a seed round, I achieved these milestones. I eliminated these risks. I raised the A round. I achieved these milestones. I eliminated these risks. Now I am raising a B round. Here are my milestones, here are my risks, and by the time I raise go to raise a C round here is the state I will be in. And then you calibrate the amount of money you raise and spend to the risks that you are pulling out of the business. And I go through all this, in a sense that sounds obvious, but I go through this because it is a systematic way to think about how the money gets raised and deployed. As compared so much of what's happening these days which is “Oh my god, let me raise as much money as I can, let me go build the fancy offices, let me go hire as many people as I can.” And just kind of hope for the best. " (excerpted from genius.com; my emphasis) 

At each inflection point one should have a clear idea of what assumptions are being confirmed and "eliminated". A roadmap/timeline of assumption confirmations would be an interesting idea in an investor presentation. Sure to raise money because of the quality of the insight, except maybe with Andreessen.

A previous post on the assumptions and risk theme: Business Model Assumptions.

Image credit: de.wikipedia.org

Related articles

16 ideas from Marc Andreessen for a more dynamic US economy

Things in Finance to be Remembered: VisiCalc, the first spreadsheet

Hire people you would leave your children with

Big Think reported on Mark Zuckerberg's hiring rule. The Founder of Facebook said to "hire people you would work for". Good rule.

My rule:

"Hire people you would leave your children with for a weekend"

I like self-directed people who take full responsibility.

I do not think Zuckerberg has children.

I also like personality tests.

Things in Finance to be Remembered: VisiCalc, the first spreadsheet

 

Please do not be confused by two consecutive posts on finance. I will return to the broader meanderings of my mind as soon as possible. Also, do not be confused by thinking "things in finance deserve to be remembered" might be a theme for a series of posts. 

Why should we remember the history of VisiCalc. As the post "Spreadsheets for Life" in Flowing Data points out, spreadsheets have been around for 35 years. I remember the first spreadsheet I used on a Wang mini-computer about 1982. It was love at first site. Having built many, many spreadsheets by hand with a slide rule, it took about 10 minutes to come up with the use case for this amazing, amazing app. 

Actually, VisiCalc, the first PC-based spreadsheet app, came on the market in 1979. VisiCalc can claim many honors:

• The app that really launched Apple 
• The app that launched personal computers as business machines
• The app that changed the way people think about a business

VisiCalc and every spreadsheet app thereafter gave the user the ability to mathematically model their business, systematically apply what-if analysis and immediately see the changes in revenue, income and cash flow. This first automated step in financial modeling probably launched or expanded the use of key performance indicators (KPIs) and dashboards. From KPIs it was easy to make the jump to "business model". Amongst the many beneficial parts of a business model, the underlying assumptions for the key business drivers of the business are paramount. So from one app--Visi Calc--which launched the modern spreadsheet, we can trace a path through to most of the important parts of modern financial management. That's why VisiCalc deserves to be remembered. 

This is a nice story from 1984 reprinted on Medium about VisiCalc and a new program called Lotus 1,2,3. My favorite quote is:

"A virtual cult of the spreadsheet has formed, complete with gurus and initiates, detailed lore, arcane rituals – and an unshakable belief that the way the world works can be embodied in rows and columns of numbers and formulas."

Everybody today wants their product to become a habit. Maybe we should set a higher standard and aspire to be a cult.

Image credit: RadioShackCatalogs.com

Related articles

Some thoughts on Business Models for Social Entrepreneurship

3 Types of Innovation

An interesting use of search

In class Monday we were discussing a student project. We were debating whether to offer urgent care or orthopedic care facilities to address orthopedic injuries, broken bones and rehabilitation. We all agreed that we needed to survey the target market, but as a quick check I recommended that students research how many people search for urgent care compared with searches for broken leg, sprained knee, etc. I think this would be interesting data and a quick check. I would still expect alot more investigation but this might be a good heads up.

An Important Benefit of Financial Innovation

One of the benefits of Uber and Waze, to cite just two, is that these companies have disrupted highly regulated parts of our lives. Bitcoin shows the promise to do the same in monetary matters and other financial services. Further efforts to innovate in financial markets will improve our lives (e.g. Apple Pay), expand sources of capital (e.g. hedge fund commercial lending) and foster new financial services (e.g. C2FO).

This article, "What Failure of Macroeconomics", provides an interesting analysis of the last banking crisis in 2008. Three key points:

1. "Banks emulate each others' strategies...., they herd. The failure of one is therefore likely to be correlated with the failure of others.

2. One bank's failure will have a chilling effect on others; they'll try to hoard cash by withdrawing credit. 

3. Non-financial firms [commercial enterprises] can't easily switch away from bank finance."

 As more and more companies continue to disrupt the regulated financial service(s) industry, the reliance on commercial banks for finance will be reduced. As this reliance on commercial banks declines, the impact of changes (wild swings) in bank commercial lending levels will be reduced. That is undoubtedly a good thing as the possibility of a future banking crisis is diminished.

One issue to ponder. If commercial banks play a smaller role in commercial finance, will the Fed still be able to effectively control the money supply. How will the government manage economic policy without an effective Fed. Don't lose sleep over this question and the upcoming inability of the government to effect economic policy. We will just sort it all out in the new, disrupted, innovative financial services market.

This post may just sound like another commercial for FA Hayek, but I think regulated industries disrupted by a Bitcoin or an Uber strongly suggests that the role of government will be reduced in the future. What the new, reduced scope of government should be is the really interesting question.

(Note: Earlier posts on the financial crisis are here.)

 

Related articles

World Bank Should Partner with C2F0

Bitcoin-Inspired Digital Currency to Power Mobile Savings App

Bitcoin Exchange Independent Reserve's CEO Dies in Motorcycle Accident

The 3 Functions of Leadership

Every year I write a few posts on leadership. Much of my thinking on leadership is influenced by the writings of the U.S. military. This morning I am lecturing to the ROTC student body at FIU. This is a summary of what I plan to say.

The three functions of leadership are:

1. Determine the mission
2. Provide resources necessary to accomplish the mission
3. Motivate people to perform effectively and efficiently

I plan to illustrate each point by an example from military history. Napoleon, Wedemeyer and Cortez respectively illustrate the three points. The common theme in each of their approaches is that they "redefined the problem" in order to properly perform one of the three functions of leadership.

My opinion of the best book on leadership is in this post from 2009, Team.

Related articles

A VC and a Consultant Talk about Leadership 

Leadership Requires Wisdom

 

 

3 Tips on Public Speaking

I get to see people speak in public quite alot--my university students, participants in Goldman Sachs 10KSB, presenters in business plan competitions, people pitching their ideas to me. Always surprises me how ineffectively people of all ages can present their ideas. If asked for advice before a presentation, this is what I say:

1. Start with a story that sets the stage. Presenting an investment opportunity, tell the story of how you came to the opportunity.
2. Present to answer the questions the audience wants answered. If you don't have this list of questions, you are not ready. (No one gives you the questions usually. You have to figure it out.)
3. It's not about you. Unless you are Richard Branson, probably no one is there to see you. People just want fresh, reliable information. So relax, stop fidgeting and enjoy being a talking head.

If you want to improve your public speaking skills, teach. Teach anything but teach. It will not make you Jay Leno, but it will make you better than most.

 

This post was inspired by a story in Presentation Zen, "The key to storytelling is in the giving, not the getting".

Related articles

3 Types of Innovation

The Proof the Internet is Spawning more Informal Education