SOPHISTICATED FINANCE

Examples of Good Thinking

 

Yesterday's reading discovered some excellent articles:

1. Esko Klipi on Medium, "It is only a few network connections away". He points out that networking is growing increasingly important as the Internet shrinks the world. Makes one realize that networks created by people could be more powerful than 20th century forms of organization.
2. Evonomics.com on inequality, "The Science of Flow Says Extreme Inequality Causes Economic Collapse". What caught my attention was a quote from Robert Reich, "But in The Work of Nations (2010), Robert Reich also points out that the companies that are flourishing through globalization and technology are ones pursuing what he calls high-value capitalism, the high-quality customization of goods and services that can’t be duplicated by mass-produced uniformity at cheap places around the world." I rarely agree with Robert Reich, but I think he is correct this time. I think that corporate governance has enforced too narrow a set of objectives and the executives have opted for the easiest path. BTW, Evonomics is doing an excellent job of trying to redefine how we look at government economic policy with a particular emphasis on complexity economics.
3. Stanford Social Innovation Review on corporate social responsibility, "Corporate Social Responsibility for a Data Age". In managing disasters much valuable data is behind corporate firewalls and not normally available to the government. The article suggests that the data be made available after the disaster, but it appears more logical to me to pre-position the data.
4. At 25iq two great articles on entrepreneurship, "A Dozen Lessons on Growth" and "A Dozen Lessons About Product/Market Fit". Just simply one of the best blogs around on entrepreneurship. Step-by-step type detail on understanding subjects that most people misunderstand.
5. An interesting article about neuroscience, "Measures of Entropy and Complexity in altered states of consciousness". What could be more geeky than entropy, complexity and neuroscience. What caught my eye was the notion of plotting complexity vs entropy. 
6. In another of my favorite blogs on economics, Marginal Revolution, "Online Education and Personalized Learning". The article makes the point that in any class there are students performing at many different grade levels. Online learning provides one way for students to follow their own pace of learning. Pace of learning is a big issue that I see rarely addressed. (See image above.)
7. Aswath Damodaran on ValueWalk, "My Snap Story: Valuing Snap Ahead Of It’s IPO!". Damodaran is a leading academic authority on valuation and Snap will be one of the biggest IPOs of 2017, if it gets away. Sorry, got confused and included a finance article
    

Image credit: Marginal Revolution

Related articles

Variations on Social Entrepreneurship

Would Y Combinator Invest in a Militia

Assumptions--More Valuable than You Think

In the new book "The Master Algorithm" by Pedro Domingos, the author makes the casual but very telling observation: "all information is statistical". This observation is based on Frank Knight's seminal views on risk and uncertainty. With so much understanding of the relationship between information and statistics, it is surprising there is not more business literature on the role of assumptions in business planning and modeling. A few good articles on the subject that I will use in my graduate engineering class on entrepreneurship are below.

1. Want A Better Valuation? Decrease Your Assumptions.
2. You Tube Assumptions—Sequoia
3. Discovery Driven Planning--McGrath
4. Managing Project Uncertainty: From Variation to Chaos (MIT)
5. The Hierarchy of Engagement
6. Theory of the Business--Drucker

Reasonably confident that Knight influenced Drucker and Drucker influenced McGrath, but I cannot find any documentation. The Hierarchy of Engagement is an article by Greylock Ventures and very practical. The Sequoia article shows the assumptions they made in their You Tube investment. 

The Master Algorithm should be required reading for everybody. If you want to understand AI, this might be the only book you need to read. No math in the book.

 

Related articles

Risk Analysis in Entrepreneurship

4 Investor Pitch Templates

My Summer Reading List

This year's reading list is shaped in part by a new course I want to teach, "Cognition, Neuroscience and Artificial Intelligence". Also, I am still trying to answer some questions for a new book on market opportunities. All of this is increasingly tied together by my growing interest in evolution and biology. For several years I have told my students to think like ants. Now I have enough background to defend the position.

The recommended readings are:

1. "The Master Algorithm" by Pedro Domingos  The book is a history of artificial intelligence with a focus on machine learning (no math). The notion of a master algorithm that can create all knowledge is a very interesting idea.
2. "Money Changes Everything" by William Goetzmann  A history of money. Should be the first reading in every introductory finance class.
3. "Our Mathematical Universe" by Max Tegmark  Reconsiders the age old question of what is reality. 
4. "The Invention of Nature" by Andrea Wulf  A biography of the first naturalist scientist--Alexander von Humboldt
5. "The Evolution of Everything" by Matt Ridley  Questions many traditional explanations of issues and shows that evolution is a better explanation
6. "The Pre-history of the Mind" by Steven Mithen  Scholarly work on the cognitive origins of art, religion and science.

 

 

AI is the Paradigm Shift

Many people believe that we are at or approaching another technology revolution or paradigm shift similar to the steam engine or the transistor. Candidates for the technology to mark the next paradigm shift are artificial intelligence (AI), Internet-of-Things (IOT), nanotechnology or perhaps a less publicized technology.

The concept of a paradigm shift was first introduced by Immanuel Kant, further developed by Thomas Kuhn and recently explored in detail by Carlota Perez. Perez has done much analysis of the cycle of a paradigm shift, where the last stage is the widespread introduction of the technology in many applications. At this stage the technology risk is lower and the greatest amounts of capital are attracted and invested.

Yesterday Lyft, the car sharing service, announced a $500 million investment from General Motors. The blog AVC, where the principals are investors in Lyft, announced that the money is to "develop a network of self-driving cars". I think this Lyft investment will be looked back on as the first big investment in Perez's last stage of a paradigm shift to AI everywhere.

(For more reading on Carlota Perez, an excellent starting point is her paper: FINANCE AND TECHNICAL CHANGE: A NEO-SCHUMPETERIAN PERSPECTIVE .)

Related articles

Have we just started the next financial crisis?

Professor Damodaran on China and its Financial Markets

NYU Professor Aswath Damodaran is a leading academic who specializes in the valuation of stocks, companies, goats and any other asset that is not an option. The Professor's blog, Musings on Markets, is a pleasure to read, very well reasoned and very educational for those interested in things financial.

Recently the Professor wrote an article, "Beijing Blunders: Bull in a China Shop!". He begins the article by discussing how it is not trivial for him to criticize China. China has the assets and wherewithal to significantly disrupt the professor's life. I commend the professor for writing the article in which he pulled no punches. More professors should consider such articles if and when warranted.

In eight years of blogging I rarely refer to a person as "Professor", although I frequently reference academics. It is a sign of my continuing respect for Professor Damodaran.

Related articles

Entrepreneurship and Complexity

Access to Capital is a Strategy

When I wrote my first book, "Billion Dollar Company: An entrepreneur's guide to business models for high growth companies", I stated that I thought Michael Porter had missed a basic strategic alternative. Porter said there were three alternative strategies:

1. Low cost
2. Focus
3. Differentiation

Based on my experience in Indonesia growing a billion dollar company in seven years, I thought there was a fourth strategy--access to capital. More capital (than the competition) offers two important benefits:

1. Faster growth
2. Better economies of scale

Together these benefits are sufficient to formulate a sustainable strategy, provided product/market fit is well documented.

Yesterday a friend was telling me that Blue Bottle Coffee had raised $45 million in venture investment with only six stores in New York and San Francisco.  Subsequent to the investment the company was on a tear to make acquisitions and grow quickly. Looks like a relatively small company planning to grow fast and big through its access to capital. This "strategy" is common in today's market of high valuations and plentiful capital. Appears I may have been right when I said that Porter missed an alternative strategy.

 

Related articles

Everybody Knows a Good Idea--Thoughts on Innovation

#Localis April 30 Miami ECOTECH

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

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

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 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

World Bank Should Partner with C2F0

This is an excerpt from an article on AVC about enterprise-oriented networks:

 “C2FO is a network of businesses and their suppliers that solves a working capital problem for the suppliers and provides a better return on capital to large enterprises. Here is how it works: C2FO has a sales force that calls on large enterprises and shows them how they can use their capital to earn a better return while solving a working capital problem for their suppliers. They bring these large enterprises onto their platform and, using C2FO, they recruit their supplier base onto the platform. They also bring all the accounts payable for the large enterprise onto the platform. Once the network and the payables are on the platform, the suppliers can bid for accelerated payment of their receivables. When these bids are accepted by the large enterprise, the suppliers get their cash more quickly and the large enterprise earns a return on the form of a discount on their accounts payable. C2FO takes a small transaction fee for facilitating this market.”

 

What caught my eye is that the C2F0 model is an excellent way for F500 companies to share value with smaller suppliers in less developed countries where capital is scarce. If a F500 company were to adopt the C2FO model worldwide for small suppliers, I think that would be a major social program consistent with social entrepreneurship. In fact, maybe it should be a requirement for all companies applying for B Corp status (above a certain size).

 A shortage of capital is a major issue in the developing world and the C2FO model helps to organize capital to solve the problem. Perhaps World Bank or Inter-American Development Bank could provide a similar service discounting F500 accounts receivables for small suppliers or partner with C2FO to expand internationally.

I think if I was the CEO of C2FO I would build my brand and value proposition around helping small businesses around the world solve their capital problems and not around "delivering efficient cash flow and bold returns". Package the pitch to F500companies around social responsibility with a return. I might also consider changing the strategy and provide technical infrastructure for a fee to organizations like World Bank or Qatar Foundation (and no longer need a direct sales force).

 

Related articles

3 Types of Innovation

The Proof the Internet is Spawning more Informal Education

Market Risk and Technology Risk

There was much discussion this weekend about Jerry Neumann's article, "Heat Death: Venture Capital in the 1980s", which chronicles the evolution of the venture capital industry from its start in the 1960s. 

One interesting part of the article was how the industry learned about the difference between market risk and technology risk. Market risk is "will people buy it" and technology risk is "will it work". In the current period, VCs generally take market risk and avoid technology risk.

However, as I thought about this dichotomy, the logic of "do something better" kept coming back to me. This approach minimizes both risks or at least frequently does, by taking an existing technology and customer base and offering something better. Google and Apple computers would be examples where the state-of-the art was advanced a bit but there was little breakthrough in terms of technology or customer base. (Amazon might have been an example of market risk and Akamai might have been an example of technology risk when they launched.)

Perhaps one is well served to understand where the business concept is on the continuum of both market and technology risk and to realize that great opportunities may exist with small changes in the market or technology risk factor.

 

Related articles

Do venture capital firms or private equity funds offer debt financing for startups?

Heat Death: Venture Capital in the 1980s

What Salespeople Teach Us about Regulation

A few years ago I ran a large salesforce. One lesson I learned is that the best salespeople could always adjust their behavior to maximize their income under any new bonus scheme. After you realize this fact, you spend ten minutes coming up with the monthly bonus scheme and two days checking that the anticipated behavior of the salespeople is consistent with the best interests of the company. Then you release the new bonus scheme.

A story in Pieria, "Show Us. The Money", reminded me of this lesson about salespeople...and many other people. The story talks in part about how Wall Street types everywhere in the world adjust their behavior in the face of new government regulation. In the face of constraining regulation, motivated buyers and sellers of financial instruments find new ways to satisfy a demand. The more successful the market is to find new ways around the regulation, the greater the supply of the new financial instrument and the greater the likelihood that asset pricing becomes distorted. When the volume of asset traded becomes large and pricing of the asset becomes distorted, the government has a new problem to consider regulating. 

I see no evidence that the government considers how markets will react in the face of regulation. I believe that governments tend to be looking at history when they draft regulation and do not anticipate how the individuals in a market will change the way they operate.

Related articles

How to Manage Risk in European Energy Markets

Financial Innovation and Risk Management

Oil Derivatives Explosion Double 2008 Sub-Prime Crisis-David Morgan

Do We Need Banks?

Last December I wrote a post, "Good Question: What Good is Wall Street". The post generated quite a lot of discussion but not in the comments. The theme of the post was:

"Banks went astray when they diverted so much capital to support trading schemes in the new derivatives....., which was not part of their original mandate as utilities."

Much discussion circulated around the use of the word "utility" and their "mandate to distribute capital".

Now it is one year later, December 2014. What has Washington learned? Maybe the better question is how should Washington be thinking about banking regulation or perhaps how do we better regulate derivatives. This quote from political economist William Tabb is insightful.

“Technological revolutions and political upheavals condition economic possibilities, which then become the givens for sustained periods of seeming stability in which regulatory regimes designed for the conditions of the social structure of accumulation of the era lend a semblance of orderly progress. These institutional forms, appropriate to one stage of development, become a drag on the development of new forces and emergent relations of production. The vitality of market forces create in their wake social problems which, when they become severe enough need to be addressed through spirited struggle out of which new rules, regulations, and institutions form. [My bold emphasis]

A bit of a leap, but I think the crisis of 2008 shows us that in finance we can no longer regulate institutions and must instead regulate financial instruments such as derivatives. Regulation of banks proved inadequate in part because so many of the key market participants were not banks or regulated by the federal government. Now if we no longer regulate banks as the means to control the financial system, why cannot anybody offer deposits, loans, insurance etc. Put $100 million on deposit with a depository, pass a background check and you can be a "bank", an "insurance" company or a mortgage lender. We could use the Bitcoin infrastructure to record transactions, document margin deposits, etc. Loan to equity ratios, derivatives outstanding to equity ratios, return on equity calculations and similar financial reports would serve as the control mechanism. Such an approach to regulation, based on assets, equity capital and profitability would provide the regulatory control, except Bitcoin would be calculating daily ratios and temporarily shutting down businesses that exceeded their permitted ratios. All transactions would be required to be done on Bitcoin or a similar system exclusively. Regulations would have to be simple enough that computers could calculate ratios, a big improvement over the current system. Asset quality would not be regulated but rather would be "managed" by the market.

The big debate would become how much capital does one have to reserve for a particular financial instrument. Maybe we just say, if it is not a debt or equity instrument, then it is a derivative/insurance product and use three reserve requirements. For example when you strip a mortgage, the principal would be classed as a debt but the interest stream would not be a loan and therefore subject to derivative/insurance reserve requirements. 

This scenario might appear fanciful. As soon as the market players start trading outside the system of government regulation my scenario looks more attractive. IT technology is transforming how financial markets work and it is time to take a completely new look at regulation.

Note: The Tabb quotation is from Complexity and the Economy by Brian Arthur. Excellent book.

Related articles

What I Do

Small financial institutions lose money to federal regulations

Complex Problems in Business Development

A friend texted me today to ask if I do consulting. Apparently he thought I just taught and mentored startup entrepreneurs. I do consulting on a:

• Project basis
• Full-time basis
• Part time basis 

I will consider clients anywhere in North or South America, Central America and the Caribbean. I love Asia but that phase of my life is probably over.

I help clients with complex business development problems, such as:

• Growth strategies (when revenues plateau)
• Acquisitions
• Market entry (U.S. and overseas)
• Marketing, branding and product positioning
• Joint ventures and other forms of partnering
• Preparation for public and private capital raising

I also develop strategies to raise the capital to support client strategies and will arrange the capital.

 

Related articles

The Future of Professional Services

Thoughts on Starting an Entrepreneurial Revolution

Inspiring Stories of Mentors Who Made a Difference for Small Business Owners

How to Improve Your Excel Skills: Modeloff Questions

I have written quite a lot about Excel for financial modeling over the years. The most popular posts are at "Excel Models and Tips" in the left column and all the Excel posts are in this archive. 

There are two ways to improve your Excel skills:

1. Review the spreadsheets of others on any of the big document sharing websites
2. Work on problems where best practice solutions are provided

The annual Financial Modeling World Championships (www.modeloff.com) start first round competition October 25. To practice for the competition they make available a series of questions and answers called the Modeloff Questions. These are Excel questions that appeared in prior year competitions. 

Over 3,000 students and young finance professionals are expected to compete in Hong Kong, London, NY, Sydney and other regional cities for the US$ 100,000 first prize. 

The Modeloff folks asked me to support their worldwide competition by promoting the event on this blog. Happy to do it.

Spinoff to an IPO

This morning I met with a company considering an IPO who thought they needed some help. Instead of the storied high tech high growth startup type company, the company was a mature company looking to "spinoff" a division as a publicly traded company. This division had grown to be a large business and the shareholders were looking to take some money off the table. After they described in more detail their objectives, I made several points:

1. They need a revenue/profit growth story for the future business; a successful past is not sufficient
2. They need a team to support investor relations in the new company, a function they did not currently have
3. They should consider recapitalizing the company before the listing as a more highly certain way to take money off the table
4. They should consider other strategic alternatives to an IPO, such as selling the division or doing a rollup

This new article from HBR,"When a Spinoff Makes Strategic Sense", basically argues that spinoffs do not make sense. The HBR article looks at spinoffs strategically but fails to consider financial benefits, such as proceeds could be deployed in a better business. In the case of the company I visited, a spinoff allows them to realize value from an underappreciated asset. Spinning it off makes it easier to understand and value.

Related articles

Facebook Stock Price Slides

Strategy--It's All About the Customer

Slump in Initial Public Offerings Bodes Poorly for U.S. Employment, Economic Growth, According to Kauffman Report

The end of banking?

For a long time I have thought that lawyers and accountants were going to be disrupted by technology. The value of such a professional service has been reduced in many cases to a license issued by a state government . The recent controversy surrounding Airbnb and the car sharing services is similarly a regulatory issue. Technology is allowing for not only services to be provided in new ways but for trust to be established between user and provider without the need for government licensing. 

Banking is a highly regulated industry where I think alternative service providers are emerging. Several examples support this trend.

1. Hedge funds are making commercial loans to small businesses because banks are restrained by regulatory concern
2. Bitcoin 
3. Stellar

Bitcoin is well known but Stellar has just emerged. Stellar describes itself as:

 

"Stellar is a decentralized protocol for sending and receiving money in any pair of currencies. This means users can, for example, send a transaction from their Yen balance and have it arrive in Euros, Yen, or even bitcoin. We’re expecting to support the usual categories of transactions: payments to a merchant, remittances back home, or rent splits with a roommate. You can hold a balance with a gateway, which is any network participant you trust to accept a deposit in exchange for credit on the network."

Stellar makes it possible for anybody to take deposits using their open source code. Such an organization could then lend the money to a hedge fund to lend to small businesses. We just duplicated most of the value of a bank with out any regulation. Imagine if Google or Facebook took the deposits in Gibraltar or Cayman islands and promised significant new jobs there in return for no local regulation. Perhaps we have more confidence in those organizations than in Citibank or Wells Fargo. 

A related HBS Working Knowledge story, "Why Small-Business Lending Is Not Recovering".

Thankyou to @john_menezes for the Stellar heads up.

 

Related articles

Bitcoin as a Protocol for Trust

Mint.com: Bitcoin is Growing; Coinbase and Mint.com are Ready to Help

Introducing Stellar: a decentralized protocol for sending and receiving money

4 Investor Pitch Templates

Last night and today I have been inundated with capital raising decks for early stage companies. Each one was just terrible and these were not student powerpoints. My students do much better decks than were prepared by mature executives some of whom are "serial entrepreneurs". These weak decks had several characteristics in common:

1. They all showed how they were similar to a well known successful company, but they never came out and said what they do in a single, declarative sentence. In several cases it almost appeared they were trying to hide the real mission of the company
2. With no documented product/market fit they do not talk about customers or target customers
3. They all circled a need but never mentioned value proposition

Below are three recent links to good advice on how to do an investor pitch and the fourth one is my all time favorite from Sequoia Capital.

1. Canaan entrepreneur pitch workbook http://www.slideshare.net/canaanpartners/canaan-pitch-workbook?qid=c8d3f5d8-94b6-41b5-b2d6-e64c3eb518ea&v=default&b=&from_search=1
2. 8 tips for creating the perfect pitch deck http://venturebeat.com/2014/04/03/8-tips-for-creating-the-perfect-pitch-deck-from-someone-whos-raised-75m/
3. The best pitch deck http://www.slideshare.net/Sky7777/the-best-startup-pitch-deck-how-to-present-to-angels-v-cs
4. Sequoia Capital business plan https://www.sequoiacap.com/grove/posts/6bzx/writing-a-business-plan

I teach the Sequoia deck in all my entrepreneurship classes. I like the simple but elegant approach. Suggests that someone put real thought into the document.

Related articles

Pitching a Deal

New Pitch Deck You Have to See for Startup Called PRISM

Business Plan Templates