Category: business advice

When Venture Capital meets its own disruption

Falling barriers to entry are disrupting Venture Capital investors as much as incumbent managers.

Tech industry veteran Paul Graham always offers challenging thoughts about the Silicon Valley business environment on his Y Combinator blog.

Last month’s post looks at investment trends and how the venture capital industry itself is being disrupted as startups become cheaper to fund. He also touches on a profound change in the modern business environment.

Graham’s point is Venture Capital firms are finding their equity stakes eroding as it becomes easier and cheaper for founders to fund their business, as a result VC terms are steadily becoming less demanding.

An interesting observation from Graham is how the attitude of graduates towards starting up businesses has changed.

When I graduated from college in 1986, there were essentially two options: get a job or go to grad school. Now there’s a third: start your own company. That’s a big change. In principle it was possible to start your own company in 1986 too, but it didn’t seem like a real possibility. It seemed possible to start a consulting company, or a niche product company, but it didn’t seem possible to start a company that would become big.

That isn’t true – people like Michael Dell, Bill Gates and Steve Jobs were creating companies that were already successes by 1986 – the difference was that startup companies in the 1980s were founded by college dropouts, not graduates of Cornell or Harvard.

In the current dot com mania, it’s now acceptable for graduates of mainstream universities to look at starting up business. For this we can probably thank Sergey Brin and Larry Page for showing how graduates can create a massive success with Google.

One wonders though how long this will last, for many of the twenty and early thirty somethings taking a punt on some start ups the option of going back to work for a consulting firm is always there. Get in your late 30s or early 40s and suddenly options start running out if you haven’t hit that big home run and found a greater fool.

There’s also the risk that the current startup mania will run out of steam, right now it’s sexy but stories like 25 million dollar investments in businesses that are barely past their concept phase do indicate the current dot com boom is approaching its peak, if it isn’t there already.

Where Graham is spot on though is that the 19th and 20th Century methods of industrial organisation are evolving into something else as technology breaks down silos and conglomerates. This is something that current executives, and those at university hoping to be the next generation of managers, should keep in mind.

Staging a sales blitzkreig to win the market battle

Retailer The Iconic is a good example of the Silicon Valley greater fool model

Part of the Silicon Valley greater fool model requires ramping whatever metrics are necessary — page views, unique visitors, revenue or profit to attract prospective buyers to acquire the business.

Elizabeth Knight in the Sydney Morning Herald looks at the cracks appearing in online retailer The Iconic where revenues of thirty million dollars were subsidised by forty-four million in losses in the e-commerce operator’s first year of trading.

The Iconic has all the hallmarks of a classic ‘buy me’ Silicon Valley operation — big marketing spend, high customer acquisition costs and fat operating losses in an effort to build market share.

Getting market share is one of the key aspects of the greater fool model, being the leader in a segment almost guarantees a buyer, usually the one of the shellshocked incumbents.

Knight quotes emails from one of The Iconic’s founders, Oliver Samwar, on the importance of being number one in their sector.

‘‘The only thing is that the time of the Blitzkrieg must be chosen wisely so that each country tells me with blood when it is time. I am ready – anytime!’’ one said.

‘‘We must be number one latest in the last month of next season. Full month, not a discount sales month

‘‘Why? Because only number one can raise unbelievable money at unbelievable valuations. I cannot raise money for number 2 etc and I have seen it how easy (sic) it is for me in Brazil and how difficult in Russia because our team f….d up.’’

As we’ve seen with companies like Groupon, being number one can impress gullible corporations but when that market position has been bought by investor’s money subsidising operations, the business is rarely sustainable.

Whether investors are prepared to continue subsidising The Iconic’s losses or if the business can attract a buyer will depend upon the business maintaining momentum on its key metrics.

Probably the most important thing for companies like The Iconic though is the availability of easy credit and accessible funds.

As we saw in the original dot com boom, when that easy money evaporates so to do most of the businesses.

For the incumbent businesses threatened by well funded upstarts, some might find the best hope for survival is to hope challengers run out of money.

In the meantime though, they may have to survive a market blitzkrieg.

Michael Dell’s struggle to transform his business

The Rationale for a Private Dell states some stark truths about the PC manufacturing industry and global management in general

Michael Dell continues to press on with his buy out bid for the computer manufacturing giant he created with a presentation to shareholders stating his case why Dell Computers would have a better future as a private company.

Dell’s assertion is the company has to move from being a PC manufacturer to a Enterprise Solutions and Services business (ESS) as computer manufacturing margins collapse in the face of a changing market and more nimble, low cost, competitors.

What’s telling in Dell’s presentation is just how fast these changes have happened, here’s some key bullet points from the slide deck.

  • Dell’s transformation from a PC-focused business to an Enterprise Solutions and Services (ESS) -focused business is critical to its future success, especially as the PC market is changing faster than anticipated.
  • The transition to the “New Dell” is highly dependent on challenged “Core Dell”performance.
  • The speed of transformation is critical, yet “Core Dell” operating income is declining faster than the growth of “New Dell” operating income.
  • Dell’s rate of transformation is being outpaced by the rapid market shift to cloud.

The market is shifting quickly against Dell’s core PC manufacturing and sales business and the company’s founder is under no illusions just how serious the problem is.

Should Michael Dell succeed, the challenge in transforming his business is going to be immense – Dell Computing was one of the 1990s businesses that reinvented both the PC industry and the vast, precise logistics chain that supports it.

It was PC companies like Dell and Gateway who showed the dot com industry how to deliver goods quickly and profitably to customers around the world. Businesses like Amazon built their models upon the sophisticated logistics systems and relationships the computer manufacturers created.

A lesson though for all of those companies that followed Dell and Gateway is that those supply chains may turn around and bite you in the future, as Michael says in his presentation;

Within the PC market, Dell faces increasingly aggressive competition from low cost competitors around the world and shifts in product demand to segments where Dell has historically been weaker.

Those low cost competitors were many of Dell’s suppliers as over time the company’s Chinese manufacturers, Filipino call centres and Malaysian assemblers have developed the management skills to compete with the US retailers rather than just be their contractors.

Something that’s being missed in the debate about globalisation at present is that its not just low value work that can be done offshore – increasingly sales, marketing and legal are moving offshore along with programmers and engineers. Now the same thing is happening with management.

The same thing is also happening with corporations as Asian giants like Samsung, Huawei, Wipro and others displace US and European incumbents.

Dell Computing has been a much a victim of that move as it has been of the decline in the PC market which means its more than one battle Michael Dell has to fight.

It may well be that Dell can survive, but we shouldn’t underestimate just how great the challenge is as the company faces major changes to its markets and the global economy.

How tech savvy are our corporate CEOs?

How aware of technology are Australia’s Chief Executive Officers?

Yesterday I asked are executives out of touch with IT industry trends.

To figure out the answer to that question, I had a look at the backgrounds of the ASX20‘s CEOs. It’s difficult to draw a conclusion from the results.

ASX 20  CEO backgrounds
Company CEO Industry background Degree
AMP Craig Dunn Financial services BComm
ANZ Bank Michael Smith Financial services Economist
BHP Billiton Andrew MacKenzie Mining Phd in Chemistry
Brambles Tom Gorman Finance Economist
Commonwealth Bank Ian Narev Consulting Law Degree
CSL Brian McNamee Medicine surgeon
Macquarie Group Ltd Nicholas Moore Investment banking lawyer
National Australia Bank Ltd Cameron Clyne investment banking arts/economics
Newcrest Mining Ltd Greg Robinson finance BSci Geology
Origin Energy Grant A. King Energy industry Civil Engineer
QBE Insurance Group Ltd John Neal finance
Rio Tinto Ltd Sam Walsh mining BComm
Santos Ltd David Knox Oil and Gas BEng (mech)
Suncorp Group Ltd Patrick Snowball Finance industry Law, LLD
Telstra Corp Ltd David Thodey IT/Telecoms BA (anthropology)
Wesfarmers Ltd Richard Goyder Diversified industrial BComm
Westfield Group Peter & Stephen Lowy Investment banking BComm
Westpac Banking Corp Gail Kelly Financial services BA
Woodside Petroleum Ltd Peter J Coleman? Oil and Gas BEng
Woolworths Ltd Grant O’Brien Retail Accountant

What stands out from the list is the dominance of executives from a financial services and commerce background, although that’s hardly surprising given the weight of the banking sector in the Australian stock market.

An encouraging trend in the mining sector, the other sector highly represented in the index, is how the industry’s CEOs tend to be from a scientific or Engineering background.

Coming from a science background would tend to indicate the CEOs are probably more across technology trends than we’d think, although the compositions of the boards would probably tell us a little more about the net saviness of the corprorate sector.

That might be an exercise for the weekend.

Are executives out of touch with IT trends?

Two business briefings raise a worrying question about the technical literacy of business executives.

Yesterday was media briefing day with a number of vendor events, including a very nice lunch with IBM, on the state of the technology industry.

One thing that was particularly striking with IBM Truth Behind The Trends survey was just how out of touch many of the executives quoted in the report seem to be with responses on topics like malware and Bring Your Own Device being firmly behind the curve.

This was borne out at the earlier media roundtable with online security company Websense where they described some of the challenges facing Chief Information Officers in making company boards and senior managers aware of technology security risks.

What surprised most of the journalists in the earlier briefing was just how clueless many of the executives seem to be about online business risks, those who went along to the following IBM briefing realised why – managers genuinely don’t understand how the internet and business technology is evolving.

That should worry investors as markets are changing rapidly and managers who don’t recognise, let alone understand, the shifts happening are jeopardizing the their business’ futures.

Why exactly business leaders are so out of touch is something we look at tomorrow where we examine the background of Australia’s CEOs.

Startups and stress

Stress is an overlooked aspect of building a new business.

An article in Business Insider describes how staff morale has collapsed at recommendation service Foursqure as the company struggles to maintain its relevance and solvency.

Something that’s missed in the current startup mania is that building a business from scratch is hard work for everyone from the founders to the staff – not to mention the investors.

While many people working in safe jobs for big organisation wax lyrical about the romance of startups, the reality is most corporate employees would be found under their desks weeping after a couple of weeks at a new business.

That stress should be something anyone considering starting or joining a start up should give deep thought about, along with all the other factors.

Australia’s economic rigor mortis

Australia has become too complacent in a competitive world warns one US business leader.

This is worth watching, Dow Chemical CEO Andrew Liveris and Australian Business Council chief Tony Shepherd spoke on Sunday with Alan Kohler on the ABC’s Inside Business.

At 5.40 Andrew Liveris says Australia is suffering a state of economic rigor mortis – “we’ve lost the ability to innovate” – with no plans and a great complacency. It’s something all Aussies should reflect upon, although don’t expect these blokes to be any help.

 

 

 

Big data’s big truths

There’s a lot of hype around Big Data but it doesn’t mean we should ignore the risks or opportunities.

One thing former Obama 2012 campaign CTO Harper Reed cannot be accused of is subtlety so his statement at the Sydney CeBIT conference last week that Big Data is Bullshit wasn’t wholly surprising.

Reed has a good point – like all IT industry buzzwords there is a fair degree of hype and BS around Big Data although his referring to it as a storage problem misses the point.

Data storage is a problem largely solved; when we’re talking about Big Data today, we’re talking more about analysing the information and managing the life cycle of an organisation’s data.

Not that these issues are new, the tech industry has been dealing with the challenges of storing, managing and analysing data since computers first appeared. In fact, that’s the reason computers were invented.

An excellent NY Times Bits blog post expands on Harper’s views and rebuts many of the myths and hype around big data.

Most important is the point that big data is not the truth, we can torture those bits and bytes to tell us anything we like.

Claims that Big Data can tell us everything or that it will conquer discrimination and make cities smarter are fanciful. It all depends on how we choose to use the data.

There are downsides with Big Data too — we live in an age where it’s easier to let the algorithm do the work and if the computer says ‘no’, then we can shrug and say “sorry it’s beyond our control.”

Letting the algorithms run our lives is one of many risks, but it doesn’t change the opportunities for businesses, governments and communities Big Data presents. If we can understand our world better, we can do smarter things.

That’s the real opportunity with Big Data and we don’t need the hype to tell us that.

And your message is? How Silicon Valley wrote its own history

Is the myth of the altruistic Silicon Valley entrepreneur an example of businesses rewriting history?

Sitting in on the Storytelling and Business panel of the Sydney Writers’ Festival it occurred to me how well Silicon Valley and the tech startup community have crafted an image for their times.

Author of What’s Mine Is Yours, Rachel Botsman focused on the need of businesses to articulate the organisation’s sense of purpose. While this begs the question of what’s the message if the business’ purpose is to enrich their senior management, it is an a good point.

What is a business’ purpose and how do you articulate it? More so, what is the purpose of your industry?

One group of businesses that has done very well in articulating their message is the Silicon Valley tech community who’ve portrayed themselves – regardless of the reality – as being driven by the altruistic aim of changing the world.

Steve Jobs was one of the leaders of this and, while we shouldn’t overlook his talents, he was a ruthless, driven businessman.

On the panel advertising industry elder Neil Lawrence raised Jobs’ ability to articulate Apple’s mission, telling the story of when the Apple CEO was challenged on the ‘Thing Different’ slogan not being good English, he replied “it’s Californian.”

Apple’s success in branding itself as a visionary, creative company – and Google’s image of ‘Don’t Do Evil’ – show how it’s possible to create an image for an organisation, an industry or even an entire industry.

In reality, Silicon Valley and the tech industry are as full of snake oil salesmen, mercanaries and paper clip counting corporate bureaucrats as any other sector, but legends have been built, and continue to be built, on the myth of  selfless entrepreneurs sacrifice all to make the world a better place.

Contrasting Silicon Valley’s success with the Australian experience was interesting, Botsman was scathing about the ability of Aussie managers in telling the story about their businesses finding most of them have lost her by the second slide of their Powerpoint presentation.

We shouldn’t get too hung up though about the nobility of telling a business’ story, Shehan Karunatilaka, former copy writer and author made the major point about business communications “story telling in business is about shifting product.”

He went on to describe the tragic career path of the advertising copy writer who comes into the ad industry believing they are a world changing artist and ends up being burned out.

“you are not an artist – you are a mouthpiece for businesses” said Shehan.

The truth is most of us in business are not artists, some parts of our work may involve creative skills – like copy writing, design or financial engineering – in reality most of us are there to make a decent living, if not a fortune.

Silicon Valley’s mythmaking shows how you can cover the mundane truth with a noble, a constant narrative which has  allowed ruthless businessmen like Steve Jobs and Mark Zuckerberg to portray themselves as selfless visionaries rather than the modern equivalents of  John Rockerfeller, Cornelius Vanderbilt and other 19th Century robber barons.

This is possibly the greatest message of all in business communications – history is written by the victors.

When you’re winning in your industry, you get to write the story.

Rethinking the middle class

Has the internet destroyed the western world’s middle class lifestyles?

Technologist Jaron Lanier says the internet has destroyed the middle classes.

He’s probably right, a similar process that put a class of mill workers out of a job in the Eighteenth Century is at work across many industries today.

Those loom workers in 18th Century Nottingham were the middle class of the day – wages were good and work was plentiful. Then technology took their jobs.

Modern technology has taken the global economy through three waves of structural change over the past thirty years, the first wave was manufacturing moving from the first world to emerging economies as global logistic chains became more efficient.

The second wave, which we’re midway through at the moment, is moving service industry jobs and middleman roles onto the net which destroys the basis of many local businesses.

Many local service businesses thrived because they were the only print shop, secretarial service or lawyer in their town or suburb. The net has destroyed that model of scarcity.

The creative classes – people like writers, photographers and musicians – are suffering from the samee changed economics of scarcity.

Until now, occupations like manual trades such a builders, truckdrivers and plumbers were thought to be immune from the changes that are affecting many service industries.

The third wave of change lead by robotics and automation will hurt many of those fields that were assumed to be immune to technological forces.

One good example are Australia’s legendary $200,000 mining truck drivers. Almost all their jobs will be automated by the end of the decade. The days of of relatively unskilled workers making huge sums in the mines has almost certainly come to an end.

So where will the jobs come from to replace those occupations we are losing? Finance writer John Mauldin believes the jobs will come, we just can’t see them right now.

He’s almost certainly right – to the displaced loom worker or stagecoach driver it would have been difficult to see where the next wave of jobs would come from, but they did.

But maybe we also have to change the definition of what is middle class and accept the late 20th Century idea of a plasma TV in every room of a six bedroom, dual car garage house in the suburbs was an historical aberration.

Just like the loom weavers of the 18th Century, it could well be the middle class incomes of the post World War II west were a passing phase.

If so, businesses and politicians who cater to the whims and the prejudices of the late Twentieth Century middle classes will find they have to change their message.

Exploiting the weak points

The Great ATM Heist illustrates weaknesses in outsourcing business processes

The Great ATM Heist, where a crime gang subverted the credit card system, could well be the digital equivalent of the Great Train Robbery of the 1960s.

While the logistics of the operation are impressive with hundreds of accomplices across twenty countries, the real moral from the story comes from how the gang targeted outsourced credit card processing companies to adjust cash limits.

Again we see the risks of throwing your problems over the fence, a system is only as reliable or secure as the weakest link and, regardless of how tight commercial contracts are, outsourced services can’t be treated as someone else’s concern.

No doubt banks around the world will be having a close look at their systems and how they can trust other organisations’ outsourced operations.

Disrupting the incumbents

Industry incumbents like Nokia and Microsoft are finding their market positions disrupted as Apple, Hauwei and Samsung reinvent the marketplaces.

One of the truisms of modern business is that no incumbent is safe, Microsoft, Nokia and Hauwei are good examples of just how businesses that five years ago dominated their industries are now struggling with changed marketplaces.

In the last two days there’s been a number of stories on how the smartphone and computer markets are changing.

According to the Wall Street Journal’s tech blog, PC manufacturers are hoping Microsoft’s changes to Windows 8 reinvigorates the computer market.

Those hopes are desperate and somewhat touching in the face of a structural shift in the marketplace. These big vendors can wait for the Big White Hope to arrive but really they have only themselves to blame for their constant mis-steps in the tablet and smartphone markets.

Now they are left behind as more nimble competitors like Apple, Samsung and the rising wave of Chinese manufacturers deliver the products consumers want.

All is not lost for Microsoft though as Chinese telecoms giant Hauwei launches a Windows Phone for the US markets which will be available through Walmart.

Hauwei’s launch in the United States is not good news though for another failing incumbent – Nokia.

Nokia’s relationship with Microsoft seems increasingly troubled and the Finnish company is struggling to retain leadership even in the emerging markets which until recently had been the only bright spot in the organisation’s global decline.

Yesterday in India, Nokia launched a $99 smartphone to shore up its failing market position on the subcontinent.

For the three months to March, Nokia had a 23 percent share of mobile phone sales in India, the world’s second-biggest cellular market by customers, Strategy Analytics estimates. Three years ago it controlled more than half the Indian market.

India isn’t the only market where Nokia is threatened – in February Hauwei launched their 4Afrika Windows Phone aimed at phone users in Egypt, Nigeria, Kenya, Ivory Coast, Angola, Morocco and South Africa.

The smartphone market is instructive on how many industries are changing, almost overnight the iPhone changed the cell phone sector and three years later Apple repeated the trick with the iPad, in both cases incumbents like Motorola, Nokia and Microsoft found themselves flat footed.

As barriers are falling with cheaper manufacturing, faster prototyping and more accessible design tools, many other industries are facing the same disruption.

The question for every incumbent should be where the next disruption is coming from.

In fact, we all need to ask that question as those disruptions are changing our own jobs and communities.