Category: Investment

China’s investment paradox

How China has used investment lies at the heart of the nation’s opportunities and the challenges facing it today.

A great video by Professor Tyler Cowen on the Marginal Revolution University website looks at China’s successes, the challenges the nation faces and the economy’s likely future.

Ultimately Cowen brings the whole story down to one factor – investment. The post 1979 investment that saw the nation’s productive capacity explode, the post 2008 investments that he believes has distorted the economy and his optimism about China’s future because of investments made in the PRC’s human capital.

It’s fourteen minutes well spent in getting a basic understand of what China has accomplished in the last 40 years and the challenges the nation currently has to deal with.

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Controlling the unicorns

Times could be getting tough for the tech unicorns as money starts getting tight

Last week Salesforce founder Marc Benioff warned the tech unicorns – companies valued at over a billion dollars based on investor funding – were leaving their stock market debuts too late.

The initial public offering of payments platform Square bears Benioff’s warning out, with the company’s IPO market value being less than the company’s implied value at its last private fundraising.

What’s notable about the unicorns’ reluctance to go public and the limited nature of the stock market floats – Square is only making 8% of its equity available – is the desire from founders and key investors not to relinquish control.

For the moment that desire not to cede control is tolerated by investors but in a declining market, shareholders may not be so tolerant.

Times could be about to get tough for the unicorns as the downside of massive valuations becomes apparent.

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Getting crowdfunding right

The success of Flow Hives in raising money for its beehive project is a good case study on getting a hardware startup right.

Crowdfunding is not for every business or project, however the great story on the success of Flow Hives shows how it can be done right.

Flow Hives, based on the North Coast of the Australian state of New South Wales, is a father and son business that has cracked the way for consumers to raise bees and get fresh honey from the hives without having to suit up.

There’s a few notable points in Flow Hives’ story  that challenges a lot of the basic wisdom about starts ups and funding we’re hearing at the moment.

Taking the long path

Flow Hives’ founders,Stu and Cedar Anderson, spent ten years getting the basics right. That’s a long time to get a Minimum Viable Product to the market.

On top of that, they were experienced bee keepers, not keen young outsiders looking to ‘disrupt’ what they saw as a staid industry.

Carefully choosing support

Like all good Australian businesses, the Andersons’ first stop was at the government where they found the support programs were too cumbersome and onerous. Another problem they’d have encountered with that path would have been the funds available are trivial compared to the time spent on compliance.

They found a similar thing with the courting of investors being too much of a distraction and, rightly, saw that VC and seed money is actually quite expensive. This made crowdfunding a viable options.

Selecting production methods

While 3D printing worked for prototypes it didn’t scale for production runs. Knowing they’d need injection moulding for their plastic parts, the Andersons chose a local supplier rather than dealing with the lowest cost operator in China so they would have better control over their supply chain.

Coupled with choosing a local supplier for their plastic components the Andersons’ also chose a US supplier for the wooden enclosures based upon the service they received.

Going with trusted suppliers meant they were able to get a good product to market quickly. When a Chinese company attempted a cheap imitation it failed because of the shoddy quality.

The Flow Hive story is a good reminder that the principles of the today’s tech startup culture are only applicable to small group of the businesses in specific sectors.

In a diverse economy, there’s many different other business principles and models that might apply. Trying to shoehorn one type of business into a different model may well be a mistake.

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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.

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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.

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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.”

smiling_curve

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.

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Nine billion opportunities for fraud

The current wave of billion dollar unicorn tech companies makes a startup investment fraud almost inevitable

Everything is not all it seems at Theranos, the medical testing startup estimated to be worth  nine billion dollars reports the Wall Street Journal.

If true, the allegations Theranos is using conventional technology to run its diagnostic tests mean most of the investment community and tech media have been sucked into an elaborate con.

While it’s too early to say whether the allegations about Theranos are true, with so many multi billion dollar ‘unicorns’ running around it’s inevitable somebody will try such a scam.

Indeed, it’s in the interests of many to promote such a unicorn and for those early into the company it could be immensely profitable.

Even if Theranos turns out to be for real, there will be those that won’t be.

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