Paul Wallbank | Paul Wallbank - Communications Professional

Crowdfunding future businesses

The SECs rules on crowdfunding are welcome, but more needs to be done to spark investment in the businesses of the future.

Three years after the Jobs Act was signed into law by President Obama, the US Securities and Investment commission has proposed the rules for crowdfunding business capital.

Behind the Jobs Act was the idea that new ways of funding businesses are needed in an era when banks, thanks to the flawed Basel Accords, have stepped away from what could be argued is one of the key functions of a financial systems – funding the wheels of commerce.

So the new regulations are needed and the idea that funding can be raised quickly from crowds of supporters is one that ties well with the current ideas of crowdfunding products.

Crowdfunding a business, particularly where equity is involved, is a very different matter than asking supporters for a few hundred dollars to manufacture a smartwatch, produce a music album or write a book. Modern securities law is based upon three centuries of charlatans defrauding investors.

The SEC’s caution is clear in the guidelines that restrict crowdfunding to a small group of businesses seeking funding through Federally approved services and drastically limit the amounts that can be raised.

A company can raise a total of $1 million through crowdfunding in a 12-month period
In any 12-month period, individual cannot stake more than $100,000.
Individuals earning less than $100,00o per year can invest either $2,000 or 5% of their annual income.
People with greater than $100,0000 can stake 10 percent of the lesser of their annual income or net worth

For companies the eligibility for crowdfunding even tighter with the following prohibited;

non-U.S. companies
securities trading companies registered under the Exchange Act
certain investment companies
companies the SEC has disqualified
companies that have failed to comply submit annual reporting requirements
companies that have no specific business plan
Companies that have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies.

That latter provision presents a problem for the tech startup based upon the current Silicon Valley ‘greater fool’ business plan however luckily for them, crowdfunding equity won’t be countered for companies worth under $25 million for other securities reporting requirements.

What will be interesting is how savvy startup founders can use these rules – perhaps use this system to create a company structure and then use product specific crowdfunding projects to raise working capital.

Just like project based crowdfunding, it’s likely these schemes will be used as a market test to measure community interest in a business. This may well also be a way to attract investors hungry for hot new startups to invest it.

What is likely though is the current insider driven model of startup funding will remain. While there’ll be many worthy businesses seeking capital through crowdfunding, we can be sure the bulk of startup money will come through the insular world of VCs and tech investors.

The main criticism though of these proposals are the low limits. This will make crowdfunding unworkable for all but the earliest and smallest of new ventures. The money will be handy for those who qualify, but more needs to be done to spark investment in the businesses of the future.

Smartwatches miss primetime

It appears the smartwatch market is stalling indicating the products were too early.

The US smartwatch market in not yet ready for prime time says Kantar Worldpanel finding most consumers are saying the devices are too expensive and don’t add enough value.

Kantar’s findings are underscored by Apple’s giving discounts to buyers of its smartwatch, something the company is certainly known for.

For all the hype, it appears the smartwatch may well have been the classic tech solution looking for a problem.

Not following the herd – Investors discover agtech

Agriculture technology is a neglected space, which means opportunities of savvy investors.

One of the most ignored industries when it comes to technology is agriculture, which is odd as farmers and their downstream supply chain are probably on of the most tech intensive industries of all.

That may be changing though, New York analyst firm CB Insights reports Agtech deals jumped three fold last year following Monsanto’s acquisition of Climate Corporation.

A $150 million a year in investments though is still quite small compared to some of the sectors investors are piling money into.

That there is comparatively little attention paid to agricultural technology companies probably tells us much about the herd mentality of investors, it also suggests there’s some great opportunities for savvy business people.

Attracting the world’s startups

Attracting young workers and entrepreneurs will be the key for prosperous countries remaining rich.

While San Francisco and Silicon Valley remain the biggest magnet for tech startups, many other countries are trying to attract entrepreneurs with preferential visa arrangements and subsidies. Successfully doing this will define the rich nations of the 21st Century.

Israel is the latest country to join the competition with the Israeli Ministry of Economy, the Ministry of Interior and the office of Chief Scientist will launch the program in the next few months which will allow entrepreneurs from around the world to come to the startup city of Tel Aviv for 24 months in order to develop innovative projects.

Entrepreneurs who wish to stay in Israel and open a startup company will be granted a specialist visa. Aryeh Deri, the nation’s Economic Minister said, “tThe Startup Visa will enable foreign entrepreneurs from around the world to develop new ideas in Israel, that will aid the development of the Israeli market”.

Israel’s Startup Visa programs joins Tel Aviv’s city-to-city-collaborations with Paris and Berlin, which allows entrepreneurs from the cities to receive a soft landing package including desks at co-working spaces, advice on visas, regulations and legal issues around starting up companies, as well as one-on-one mentoring assistance and access to the ecosystem in each town.

Just as Israel, France and Germany are opening up, it appears the UK government is tightening up its visa requirements much to the anger of their startup community.

The tech startup community is only a small part of the bigger economy, the challenges facing all these countries is the fight to win the global race for talent and young workers.

For almost all the developed world facing stagnant growth rates and ageing workforces, winning that race will define their prosperity for the rest of the 21st Century.

Risking a digital recession

Europe risks a digital recession as investment and innovation decline

Europe risks heading into a ‘digital recession’ warn Bhaskar Chakravorti and Ravi Shankar Chaturvedi in the Harvard Business Review.

Chaturvedi and Chakravorti base their concerns on the Digital Innovation Index they created that looks at the sophistication and speed of digital change across fifty developed countries.

Most Northern European countries, along with Japan and Australia, were advanced but their rate of adoption was falling risking their economies dropping behind the researchers found.

The solution offered by the authors was for the countries to encourage investment, immigration and exports.

The only way they can jump-start their recovery is to follow what Stand Out countries do best: redouble on innovation and continue to seek markets beyond domestic borders. Stall Out countries are also aging. Attracting talented, young immigrants can help revive innovation quickly.

A striking problem in Europe is the state of e-commerce across the continent where consumers prefer to buy from US based sites than from those of fellow EU countries.

In many of the nations government Austerity policies have also hurt investment while risk averse cultures have discouraged innovation and new business formation.

For Europe, the risks of being left behind are real and with an aging population a fall in living standards is a likely possibility. It would be a shame if the European Union experiment ends up failing due to a digital recession.

Profiting from the industrial internet

How will companies make profits from industries being shifted to lower cost structures?

Opening the first official day of Oracle Open World, CEO Mark Hurd spoke with James Fowler, the Chief Information Officer of General Electric about the company’s digital transformation.

Fowler described how the company intends to be driving $15 billion in revenues from its digital operation in the face of stagnant industrial spending.

Earlier in the presentation Hurd had described the problem of stagnant spending facing all major industrial companies, whether they are enterprise software providers like Oracle or engineering organisations like GE, where companies are ‘sweating the assets’ ruthlessly.

For GE, making a compelling argument for companies to reinvest in new capital equipment is essential while Oracle is facing an industry wide decline in revenues and a structural shift to cloud technologies which Hurd described in stark tones.

Last year, he claims, the major tech companies saw a gross decline of $16.4 billion in revenues while cloud services only picked up by billion meaning the market shrank by fifteen billion dollars.

That decline would deeply worry a salesperson like Hurd given the declining market means smaller commissions and fewer sales so it’s unsurprising the company is pivoting as hard as it can into the cloud.

GE on the other hand is making a huge bet on the future of its market by proactively shifting onto digital and cloud services.

The challenge though for all these companies is making money from these new business models those who figure it out will be the industrial giants of the next century. There’s no guarantee any of today’s will be among them.

Killing the business of complexity

A simpler business environment means lower margins. If you profit from complexity you have a problem

“The cardinal sin of the computing industry is the creation of complexity,” is quote attributed to Oracle founder Larry Ellison and often repeated at the company’s Open World forum which I’m attending at the moment in San Francisco.

For the computer industry that complexity has been a very profitable profitable business with everything from the local computer shop through to the big technology vendors and integrators.

One of the biggest beneficiaries of that complexity were the salespeople, big complex enterprise deals meant big commissions.

With the shift to cloud services and apps, those fat margins and commissions have evaporated, leaving the lucrative old models of business stranded. IBM are probably the greatest victim of this while Microsoft are, once again, showing the company’s ability to evolve in the face of a fundamental market change.

For the salespeople the days of fat commissions are over, with thinner margins it’s not possible to pay big lump sums for winning contracts.

The simplification of the computer industry is changing the fortunes of many IT businesses, but that change isn’t limited to the tech sector or their salespeople as those fundamental changes are rippling into other sectors.

A constant claim by Internet of Things evangelists is that the IoT will squeeze inefficiencies out of businesses and this is exactly what we’re seeing with cloud and mobile based services like Uber and AirBnB.

If you’re in a business that profits from market inefficiencies then it might be time to figure out how to survive in a low margin environment. The challenge facing companies like Oracle is one whole industries are now having to face.

Saving the records of our times

The World Wide Web describes our times. San Francisco’s Internet Archive aims to be the keeper of that history

The World Wide Web describes our times but it’s an incomplete document as sites, pages and posts are lost, deleted or edited. San Francisco’s Internet Archive aims to be the keeper of that history.

As example of how fragile our online records are is illustrated by the tale of Kevin Vaughan’s Pulitzer Prize nominated story describing a 1960s community tragedy for the Rocky Mountain News.

The 34 part piece captivated the newspaper’s readership when it was published in 2007 but two years later, the Rocky Mountain News went broke and the story disappeared along with the rest of the website. The Atlantic Magazine describes Vaughan’s efforts to recover and republish his story.

Vaughan’s efforts to recover his work are not unique, websites are constantly being shut down, accounts censored and social media posts deleted. In the Coweb, The New Yorker’s Jill LaPore describes how the Ukrainian militia leader responsible for shooting down MH17 promptly deleted the message showing the plane’s remains and how the Internet Archive preserved that damming post.

Last week in San Francisco the Internet Archive held their Building Libraries Together event where director Brewster Kahle described their efforts to preserve as much of the web as possible for future generations.

The Internet Archive itself is in a restored church that seems almost custom built for the organisation. In her New Yorker piece, essential reading for those wanting to understand the project, LaPore describes Kahle’s affection for the building.

He loves that the church’s cornerstone was laid in 1923: everything published in the United States before that date lies in the public domain. A temple built in copyright’s year zero seemed fated. Kahle hops, just slightly, in his shoes when he gets excited. He says, showing me the church, “It’s Greek!”

For the Building Libraries Together event, the Internet Archive had spread out a series of exhibits on the organisation’s activities that range from trawling the web through to scanning books, digitising movie reels, saving old video games and collecting TV news broadcasts.

One of the important functions the Archive does is create collections around major events – the capture of the MH17 shoot down was part their Ukrainian War collection – which illustrates the problem of ‘link rot’ as many sites set up around events such as the Occupy movement or the Ferguson protests are now dead or occupied by cybersquatters.

Running a service like the Internet Archive is labor intensive and in an expensive city like San Francisco where almost all the staff could be paid substantially better working in the tech sector and the pay isn’t exactly stellar.

Kahle jokes “because we can’t pay stock options, those who stay three years here get a statue made of themselves.

The statues line one side of the old church hall that also doubles as an event space and the server room. At the back of the auditorium are the computers themselves quietly flashing away each time the archive is being read.

For the presentations, Kahle bubbles away with his thoughts on the importance of preserving the Internet and Kalev Hannes Leetaru‘s presentation on data visualisation raised some important topics on copyright and communications which this blog intends to explore deeper in the future.

The final part of the night’s presentation was an award to the Grateful Dead’s lyricist, John Perry Barlow, for his work in trying to keep intellectual property open and accessible.

At the end of the night, the crowd left with their gifts and t-shirts and the exhibits had packed up.

One of the stand out exhibits was the virtual reality stand where an old lady tried an Oculus Rift headset for the first time, “this is wonderful. I just want to reach out and touch everything,” she cried.

Preserving that wonder and the promised possibilities of our time is possibly the most important thing The Internet Archive can do. In an era where many talk of open information but few genuinely practice it, we run the risk of leaving an information dark ages for future generations.

How we preserve a record of our times for future generations is a pressing concern. The Internet Archive is one step to solving that problem.

Founder therapy and Smiley curves – the tough world of hardware startups

San Francisco’s Highway One incubator looks to ease the pain for hardware startups

There’s no doubt building a hardware startup is hard, whether it’s sensor networks, smart lights or home automation hubs getting physical products to the market is far tougher than launching an online service or app.

In a light industrial part of San Francisco’s Inner Mission district, the Highway One incubator is one of the initiatives looking at helping entrepreneurs bring their ideas to market.

“Our goal is to help hardware startups scale faster,” says Brady Forrest the director of Highway One. “We turn prototypes into products. People come here with an idea and we make sure they can implement it, we bring a lot of design best practices and engineering best practices and make sure they are being honest with themselves.”

“I also end up conducting a lot of founder therapy.”

The selection process

Getting onto the four-month program is competitive with applicants being subjected to a rigorous vetting process, “they fill out a double page application, send in a video of them telling their story and then a video of them using a prototype.”

“Then we start to talk with some business analysts to check the market sizes, competitors and then we go to an engineering review to check the team has the technical chops and that prototype is what they say it and that it’s achievable.”

Once on the program the course is an intense immersion on building a product with access to a prototyping lab, support services and a 10-day trip to Shenzhen, China, to learn about global manufacturing.

The Shenzhen link is important as Highway One is part of PCH International, an Irish company born out of founder Liam Casey’s case work in sourcing Chinese manufacturers. This Fortune magazine profile of Casey and PCH describes how deeply embedded the company is in global supply chains.

Want investors want

At the end of the incubator process is a pitch day before potential investors. Right now Forrest says, “I think investors want to de-risk as much as possible. Right now hardware is so expensive and it’s higher risk. Yet in a lot of ways it’s easier in a lot of ways for people to know what they’re getting.”

Part of the challenge in funding hardware startups lies in financing the fabrication phase of the product’s development. Forrest cites the ‘Smiley Curve’, originally described by Acer founder Stan Shih, where the value added is at the beginning and ends of the cycle.

“The VC’s don’t like to fund the build part, one nice thing for startups is that they can get manufacturers will take on the build part so they don’t have to seek funding for working capital”

Hardware’s next wave

For investors, this makes funding hardware startups easier for investors. “It’s still not easy though,” Forrest warns. “It’s become harder for hardware startups to raise new rounds, so they have to watch their burn.”

While at the moment a lot of the focus is on wearables and the IoT, Forrest sees the Federal Drug Administration’s new rules on medical accessories changing the sort of devices being pitched to the program. “I now think we’re moving into a new field where the devices will have an effect on the body. The FDA’s new rules around making it easier to make things around FDA approved devices will open that.”

He’ll find out soon what the next big thing is in hardware startups as applications for Highway One’s May 2016 round of participants is now open.

Eric Schmidt on managing Google

In an interview with LinkedIn founder Reid Hoffman, Google chairman Eric Schmidt describes how he managed the company’s high growth.

“In all my issues at Google, I knew I had no idea what to do, but I knew that I had the best team ever assembled to figure out what to do,” says Google – and now Alphabet – chairman Eric Schmidt in an interview with LinkedIn founder Reid Hoffman.

Schmidt’s interview is a great insight into managing fast growth companies,”almost all small companies are full of energy and no process”. While he reflects on his early days at stricken companies like Sun (“tumultuous and political”) and Novell (“the books were cooked, and people were frauds”).

Moving to Google he found all of his management skills exercised at a company with a unique culture and rapidly growing headcount.

One notable anecdote is how Larry Page kept a 100k cheque from an early investor in his pocket for a month before cashing it.

Compare and contrast that attitude with the current startup mania where by the end of that day a media release would be issued proclaiming the company to be a new unicorn on that valuation.

Schmidt’s view, like many others, is that the real key to success in the company is the people. This echoes the interview with Meltwater’s CEO earlier this week where Jørn Lyseggen described how the key to starting a venture in a new country was the first five people hired.

One great takeaway Schmidt has from his time at Google is how great companies are created through the Minimal Viable Product method, “the way you build great products is small teams with strong leaders who make tradeoffs and work all night to build a product that just barely works.Look at the iPod. Look at the iPhone. No apps. But now it’s 70% of the revenue of the world’s most valuable company.”

Ultimately though Schmidt’s advice is to make decisions quickly, “do things sooner and make fewer mistakes. The question is, what causes me not to make those decisions quickly.”

“Some people are quicker than others, and it’s not clear which actually need to be answered quickly. Hindsight is always that you make the important decisions more quickly.”