Category: Investment

Transferring risk to the customer

The business model of many web startups transfers unacceptable risks to their users.

AirBnB is one of the poster children for the “collaborative consumption” model of internet businesses where people can put their spare resources, in this case rooms, out into the marketplace.

Like most web based businesses though the customer service is poor and the proprietors try to push responsibility for the platform’s use back onto the site’s users.

A good example of this is an article this week in the New York Times where AirBnB hosts risk fines and eviction for breaching their leases or local accommodation laws.

When Nigel Warren rented out his New York apartment while he was out of town, he returned to find he was facing eviction and up to $40,000 in fines. Fortunately he avoided both but AirBnB did little to help him except to point him in the direction of the terms and conditions which required him to obey all local laws.

The New York Times asked AirBnB for comment and received corporate platitudes about how their service helps struggling home owners but no real response to the risks of falling foul to local government, landlords, building owners or insurance problems by sub-letting their residences.

Failing the customer service test is not just AirBnB’s problem, Vlad Gurovich was scammed by a buyer on eBay and now he finds PayPal is chasing him for outstanding money.

This is a pretty typical problem for PayPal and eBay customers – as Vlad has found, the various seller protections often prove to be useless when dispute resolution favours scammersand PayPal’s philosophy of shutting down accounts unilaterally and without appeal exposes sellers to substantial risks.

Interestingly, PayPal’s president David Marcus claimed earlier this year that he was trying to change this culture within the company. It seems that’s not going well.

PayPal, eBay and AirBnB are alone in this of Soviet customer support model – Amazon, Google and most web2.0 businesses have this culture.

In many ways it’s understandable as dealing with customers is hard. In the view of the modern business world, cutting deals is glamorous while looking after customers is a grubby, low level task that should be outsourced whenever possible.

Pushing the risks onto users also makes sense from a business perspective, that makes the billion dollar valuations of these services look even better.

For the founders of these services, none of this is a problem. By the time the true costs and risks are understood, the founders have made their exit and the greater fools who bought the businesses have to deal with the mess.

While the greater fools can afford to carry the costs, the real concern is for users who may found themselves out of money and out of a place to live.

That’s why the founders of these businesses need to be called to account for their ethical lapses.

Is Australia missing the Indonesian opportunity?

Mary Meeker’s state of the internet report emphasises the opportunities in South East Asian markets.

Mary Meeker’s annual State of the Internet Report looks at the trends driving the online economy. One area that should be of concern is that Australian entrepreneurs are overlooking one of the world’s biggest growth markets that is sitting right on the nation’s doorstep.

Early in Mary’s overview, on slides 5 and 7, she shows the growth of various markets. Indonesia is the second biggest growth market for internet users – 58% year on year to 55 million – and eighth in the world for smartphone growth with a 36% increase last year taking total users to 27 million.

Given the penetration of both smartphones and the internet are low with only one quarter of Indonesians connected to the internet and less than one mobile phone in ten currently being a smartphone, there is massive potential for the savvy entrepreneur.

While there’s a steady stream of stream of Australian app developers and entrepreneurs heading to Silicon Valley, London and a few to Singapore there’s very few looking to their biggest neighbour.

This ignoring of Indonesia is one of the many omissions in the Australia in the Asian Century report; despite being one of Australia’s closest neighbours with the world’s fourth largest population and an economy growing at over 6% per year, both businesses and governments tend to overlook the nation.

For Australia, the tragedy is that Indonesia has a lot offer businesses that do more than just dig up coal and iron ore.

Perhaps now the mining boom is over, entrepreneurs and governments might start to take markets like Indonesia, and other South East Asian countries more seriously. It’s an omission that’s currently costing the country dearly.

Disrupting the disrupters

Silicon Valley’s investment models are changing as attention moves from the consumer to the enterprise.

Two days ago, iconic venture capital investor Fred Wilson, wrote about the changing nature of the tech industry’s VC investments.

Fred puts the changes down to three factors; maturing markets where big players increasingly dominate, the move to mobile which Cristina Cordova examines in more detail and the shift in focus from the consumer market to the enterprise sector.

The last factor bears more examination as consumer and enterprise are very different and there’s no guarantee that businesses built around thousands of people downloading apps or accessing websites can pivot into selling into corporations and government agencies.

Probably the biggest problem is the consumer or small business freemium model doesn’t cut it in the enterprises who are prepared to pay big sums for highly reliable and secure services.

Similarly the enterprise model of fat sales commissions paid for by big implementation costs and expensive support contracts doesn’t quite fly either for these start up business. There’s also a good argument that high margin enterprise model is doomed anyway as cloud services displace costly in-house installations.

In the transition from consumer to enterprise is difficult and most companies have struggled to make the jump, even Google Docs has been a hard sell into the corporate sector.

At the enterprise end, cloud services are cutting margins as IBM and Oracle are finding. Both companies are moving across to cloud products and now a lot of salespeople and consultants in those organisations are looking at a substantial drop in their standards of living.

More importantly for the startup and VC communities, the “greater fool” model doesn’t work in the enterprise space. Hyping a business which has barely made a cent in revenue but does have a million users is very different to building a stable corporate platform.

It may well be the move to the enterprise by Silicon Valley is because the consumer model has run out of “greater fools” who’ll buy overhyped photo sharing apps or social media platforms of dubious value.

This change in investment behaviour also has lessons for governments trying to copy Silicon Valley. The puck moves fast in the investment community while governments, by definition, are slow.

By the time governments have setup their programs, the markets have moved on and many of the hot technologies of two years prior are now old hat. This is exactly what we’re seeing in the apps world.

We often hear about technology causing disruption, often though we forget that those disruptive technologies can be ephemeral as they are disrupted themselves.

As these industries evolve, we’ll see how well the disrupters deal with being disrupted.

Digital maturity and the profitable business

How digitally mature is your business?

“The advantages of Digital Maturity”‘ a paper recently released by researchers at the MIT Sloan school of management looked at how different businesses adopted technology and the effect this had on the companies’ profits.

The authors of the paper, George Westerman, Didier Bonnet and Andrew McAfee, defined ‘digital maturity as a combination of a company’s level of technology investment and the management skills to implement that technology. From this they classify businesses into four categories – the beginners, conservatives, fashionistas and digirati.

Wallowing in the bottom right are the beginners, who have little idea of how to use technology and as a consequence don’t apply tech to their business. While they’ll use computers and will almost certainly use tools like ERPs and accounting software, they won’t implement them beyond their immediate needs.

This could describe thousands of big and small businesses who have learned just enough to do what they need but don’t really understand, or care, about what their IT systems can do for the way they work.

Above the beginners sit the fashionistas, the businesses who like shiny tech things but don’t really have a strategic understanding of technology or how to apply it effectively. As a consequence the digital tools are underused and fashionistas don’t use them much more effectively than the beginners.

More effective users of technology are the conservatives and digerati, the latter are like the fashionistas except their managements understand how to integrate technology into their business.

The conservatives are probably the most typical business, slow to adopt new technology but when they do, the management ensures it is used effectively.

Of the four groups, MIT’s researchers found that the digerati and conservative categories earned between 9 and 26% more profit than their peers.

The use of technology makes a difference as well with the fashionistas getting a 16% better return on assets than the conservatives which is something worth noting about the adoption of tech in a business.

What the researchers concluded was that businesses who aren’t adopting technology are falling further behind in skills as well as profit noting that attaining ‘digital maturity’ takes several years.

It’s worthwhile reflecting on how digitally mature your business is and reviewing exactly how you’re using technology in your organisation. With the tools available for today’s business, there’s no reason to be playing with the beginners.

Reinventing the connected bank

Financial institutions are evolving as technology changes their business

Yesterday the National Australia Bank had a media briefing to show how they, like their competitors, are revamping their entire business around new technologies.

The investments are substantial and the re-organisation of the business is too as the old model of branch based banking only available from 9am to 4.30pm is superseded by the always on model of Internet banking delivered through tablets and smartphones.

One of the notable points the NAB executives made was their move to authenticating customers through voice recognition. A trial had found the system reduced fraud and social engineering attempts dramatically.

The use of voice recognition makes sense as it reduces the reliance on users remembering passwords or having to give over personal information that can often be gleaned off social media sites.

Again we’re seeing data security evolving away from passwords.

On the social media front, NAB are also offering their small business customers Facebook selling tools in collaboration with social media sales platform Tiger Pistol.

While it’s questionable that businesses will get that much from a Facebook store, it’s a good attempt from the bank to add some value and encourage their commercial customers to move online.

The move online is essential as the bank noted that online sales through their merchant platforms are up 23% as opposed to an anaemic 2.5% in general sales.

Along with passwords dying, the NAB also found that the cash register is dying and being replaced with smartphone and tablet apps. The bank itself is moving its online platforms to being ‘device agnostic’ so as not to be locked into any one technology.

What the NAB, and its competitor the Commonwealth Bank, are showing is the importance of having modern systems which are flexible enough to evolve with changes in the marketplace.

Smaller businesses could learn from the banks on just how important this investment is. The organisations who aren’t making these changes are steadily being left behind.

Silicon lemmings

How many investors blindly following Silicon Valley’s manias will lose their money?

Despite their self proclaimed belief in thinking different, many of today’s internet entrepreneurs tend to travel in flocks and follow the whichever business model is currently being hyped by Silicon Valley’s insiders.

From the original dot com boom in the late 1990s to today, web entrepreneurs and their investors jump onto the bandwagon of the day – it could be online shopping, photography applications, group buying services and taxi apps which are the flavour of the moment.

The latest taxi app is Click-a-Taxi, a European venture which has raised a stingy $1.5 million in second-round funding, which joins a legion of taxi and hire car apps following in the wake of market leader Uber.

Unfortunately for the investors in these taxi and hire car apps, these services are making some pretty powerful enemies.

Around the world gatekeepers such as taxi companies and booking services do their best to keep drivers in poverty while over charging passengers for a poor service.

The new apps disrupt that business model by offering a better service for customers and a better deal for drivers – most importantly it deprives the gatekeepers of their cut.

Predictably, the backlash is fierce with 15 US and Canadian cities proposing to tighten the rules on the use of GPS and smartphone apps.

These backlashes are going to prove expensive to the investors as Silicon Valley entrepreneurs have a habit of under-estimating the power of regulatory barriers. How the current crop of taxi apps deal with this will determine which lemmings go over the cliff* and which ones survive.

One group of Silicon Valley lemmings lying dazed at the bottom of a cliff face are those who invested in the group buying hype of the last two years.

Market leader Groupon is now reportedly moving away from daily deals to ‘always on’ deals, which kills the whole point of group buying sites. Most of the copycats are already dead.

Former Cudo CEO Billy Tucker predicts that in the Australian market – which was flooded by a wave of Groupon imitators in 2010 and 11 – will only have a dozen survivors out of the top 50 listed earlier this year.

Investors in these look-a-like services had a gamble that a greater fool would buy the operation, usually a big corporation run by executives with a fear of missing out. The ones who missed out quietly swallowed their losses and moved on to the next mania – which appears to be taxi apps.

For the taxi applications, the buyers of the apps will probably be the incumbent gatekeepers, who aren’t really fools at all.

It wouldn’t be surprising to find the smarter look-a-like operators are already talking to the taxi companies about an app which will, miraculously, comply with all the requirements of the local regulators.

As for the rest, they’ll do their dough.

What is going to be interesting though is the battle between Uber and the various taxi regulators around the world, particularly in countries where politicians jump to the whims of their business cronies.

*lemmings don’t really throw themselves off cliffs, that myth was invented by the Walt Disney Corporation. Sadly Australian, particularly NSW, politicians favouring ticket clippers and rent seekers is no myth.

Desperate Ken and market realities

Adam Smith’s invisible hand of the market is giving some people a nasty slap over the head.

Ken Slamet has a problem, his in-laws are trying to sell the family house and no-one will give them the price they want.

The house at 228 Warrimoo Ave has been on the market through an agent for more than 100 days, pulling in ridiculously low offers, Mr Slamet said.

Depending on the deposit, Mr Slamet is seeking between $1.5 million and $1.6 million for the house his wife grew up in.

One would argue that those “ridiculously low offers” are actually Mr Market giving Ken and his in-laws a slap of reality. They are simply asking for too much money.

St Ives, a suburb on Sydney’s Upper North Shore, is going through demographic change. In 1960s and 70s St Ives was the suburb for successful stock brokers and bankers, however in the 1980s and 90s that demographic decided they wanted to live closer to the city and Harbour and suburbs like Mosman and Clontarf became their areas of choice.

For Ken’s in-laws and their neighbours, this is bad news as few other people can afford 1970s mansions on large blocks within 30km of Sydney. Those who do manage to sell often find the buyers are developers who sub-divide to build townhouses or apartment blocks, madness in a congested, car-dependent suburb with poor public transport links.

Adam Smith’s invisible hand of the market is giving those holding properties that were attractive to stockbrokers in 1972 a nasty slap over the head in 2012.

Ken though has a solution for his problem – he’s offering a rent to buy scheme at a mere snip of $2297 per week. An amount 70% higher than the average Sydneysider’s gross income and a whopping four and half times the city’s average rent of $500.

Good luck with that.

The real problem is that Ken’s in-laws are stuck with expectations higher than the market reality. Like many of us in the Western world, they believe their assets are worth more than they really are.

As the global economy deleverages there will be many more people like Ken’s family. For many the transition to a less wealthy lifestyle is going to be tough.

Tech’s tough days

Apple and Amazon’s quarterly reports steal the attention from Microsoft’s Windows 8 launch

Today sees another tough day for tech stocks with both Apple and Amazon missing their projected earnings which again finds Microsoft being stood up at their own party.

For Amazon, along with the costs involved with a new range of Kindles, there’s a huge write down in their Living Social investment, another indicator that the group buying bubble has passed into history alongside tulips, 19th Century Argentinian railway bonds and South Sea investments.

It’s worrying that while Amazon’s quarterly sales have increased by 23% over last year’s figures to $11.546 billion dollars, their cost of sales has also gone up 23% from $8.325 to $10.319 billion. This is a trend to watch closely over the next few quarters.

Unlike Amazon, Apple still made a fat profit with income going up to $8.2 billion for the quarter, an increase of 24%. This missed many Wall Street analysts’ estimates.

Apple’s missed earnings were put down to supply chain constraints and development costs, but what jumps out looking at the cash flow is the six billion turnaround in the company’s Accounts Receivable. One assumes this is the value of pending invoices on the new ranges of iPhones, iMacs and iPads sent out to their sales channel.

If that’s right, Apple are looking at a big boost in their cashflow next month, although there’s few companies who would like to have five billion dollars in outstanding invoices in today’s economic climate.

Once again though, Apple have managed to steal Microsoft’s thunder. Despite the glitz and glamour of the Windows 8 launch in New York, Microsoft’s announcement has been muted by the tech and business press’ reaction to the earnings reports.

What is clear from all three companies though is that hand held devices – the Apple iPad, Amazon Kindle and Microsoft Surface – are going dominate the tech and financial coverage of all three companies for the rest of the year.

Building new technological Jerusalems

Britain’s hopes of building a new technology hub are similar to those of Harold Wilson – how much do they owe the ideology of our times?

A Telegraph profile of Joanna Shields, the incoming Chief Executive of London’s Tech City Investment Organisation, is an interesting view of how we see economic development and the route to building the industrial centres of the future. Much of that view is distorted by the ideologies of our times.

London’s Tech City is a brave project and somewhat reminiscent of future British Prime Minister Harold Wilson’s 1963 proclamation about the UK’s future lying in harnessing the “white heat of technology.” From Dictionary.com;

“We are redefining and we are restating our socialism in terms of the scientific revolution…. The Britain that is going to be forged in the white heat of this revolution will be no place for restrictive practices or outdated methods on either side of industry.”

Fifty years later a notable part of Wilson’s speech is the use of the word “socialism” – the very thought of a mainstream politician using the “s-word” today and being elected shortly afterwards is unthinkable.

Today the ideology is somewhat different – much of Tech City’s objectives are around aping the models of Ireland and Silicon Valley – which in itself is accepting the failed beliefs of our times.

Based around London’s “Silicon Roundabout” – a term reminding those of us of a certain age of a childhood TV series – the heart of the Tech City strategy lies the tax incentives used by the Irish to build the “Celtic Tiger” of the 1990s and government investment funds to create an entrepreneurial hub similar to Silicon Valley, something also done in Dublin with the Digital Hub.

It’s hard not to think that copying these models is a flawed strategy – Silicon Valley is the result of four generations of technology investment by the United States military which is beyond the resources of the British government, and probably beyond today’s cash strapped US government, while the Celtic Tiger today lies wounded in the rubble of Ireland’s over leveraged economy.

At the core of both Silicon Valley’s startup culture and Ireland’s corporate incentives are the ideologies of the 1980s which celebrates a hairy-chested Ayn Rand type individualism while at the same time perversely relying upon government spending. Ultimately failure is not an option as governments will step in to guarantee investment returns and management bonuses.

Just up the M1 and M6 from London’s Silicon Roundabout are the remains of what were the Silicon Valleys of the eighteenth and nineteenth centuries.

The manufacturing industries of the English Midlands or the woollen mills of Yorkshire revolutionised the global societies of their times. These were built by individuals and investors who knew they could be ruined by a poor investment and managers who retired to the parlour with a pistol if the enterprise they were trusted to run failed.

Today’s investment attraction ideologies – tax discounts to big corporations and grants to entrepreneurs – are in a touching way not dissimilar to Harold Wilson’s 1960s belief in socialism.

At the time of Wilson’s 1963 speech China and much of the communist world were showing that socialism, with its failed Five Year Plans and Great Leaps Forward of the 1950s, was not the answer for countries wanting to harness the “white heat of technology.”

Similarly today’s Corporatist model of massive government support of ‘too big to fail’ corporations is just as much a failed ideology, like the socialists of the mid 1960s had their world views had been framed in the depression of the 193os, today’s leaders are blinded by their beliefs that were shaped by the freewheeling 1980s.

Whether the next Silicon Valley will be in London, or somewhere like Nairobi or Tashkent, it probably won’t be born out of a centrally planned government initiative born out of the certainties of Margaret Thatcher or Ronald Reagan anymore than the 1960s technological revolution was born out of Karl Marx or Josef Engels.

Silicon Valley itself was the happy unintended consequence of the Cold War and the Space Race, which we reap the benefits of today.

Every ideology creates its own set of unintended consequences, those created by today’s beliefs will be just as surprising to us as punk rockers were to the aging Harold Wilson.

Maybe Tech City will help Britain will do better at this attempt to regain its position as global economic powerhouse, but you can’t help thinking that economic salvation might come from some West Indian or Sikh kid working out of a storage unit in Warrington than a bunch of white middle class guys celebrating a government grant over a glass of Bolly in Shoreditch.

Walking the floor

Getting out of the office and seeing what your customers and staff are doing is a neglected management fundamental.

“He walks the site three times a day,” said awed contractors about a construction project manager – who we’ll call Rob – that I encountered as a cadet Engineer in the building industry. Getting out of his site office and seeing what was going on made sure dodgy contractors or inexperienced trainees like me couldn’t slow down his projects.

Slate Magazine’s story of how the Wendy’s hamburger chain changed the US fast food industry recalls how Rob would successfully run his projects and the importance of hands on management.

Jim Near was recruited as president by his friend and Wendy’s founder Dave Thomas to get the business on track after over-extending in the mid 1980s. Slate says of Jim’s hands-on management style;

Near liked to stalk through the dining areas of his stores examining people’s trays. If customers were leaving fries, he’d go harass the fryers: Were they serving the potatoes too hot? Too cold? Not using enough shortening? And he would sit in his car in the parking lot, surveilling the activity at the drive-thru window.

That obsession sounds like Steve Jobs and its no-coincidence; Jobs, Jim Near and Rob the project manager gave a damn about the product that was being delivered. Rather than sitting in an office obsessing over paperwork and meeting artificial KPIs, these effective leaders got out and saw what the realities were in their business.

Probably the best example of this “management by walking the floor” ethos was Bob Ansett who built up the Australian Budget Rent-A-Car business in the 1970s. Every senior manager was required to spend a couple of days a month working on one of Budget’s rental desk dealing with customers.

That policy forced Budget’s executives to understand the business, just as Jim Near was described as ““a ketchup-in-his-veins type of guy” through working at every level in the fast food industry.

One of the many conceits in modern management is the idea that everything – from building high rise towers, running car rental companies or operating a hamburger chain – is like selling soap. This philosophy ignores that every industry has its own characteristics and even selling soap has its own unique challenges in different markets.

It’s easy to think everything works as described in a 1980s business school textbook when you have artificially constructed KPIs and layers of managers to deflect responsibility.

Over the last quarter of the Twentieth Century we saw customer service become disdained in the Corporatist business culture which favours accountants and lawyers as managers who rely on marketing people and lobbyists to protect them from the reality that they aren’t really very good at running their companies.

Now that era has come to an end and the times now suit those who listen to customers and the marketplace. Walking the floor and paying attention to what the public are saying about us on new media are competitive advantages.

While the corporatists lobby their friends in government for subsidies and protection, entrepreneurs and genuine business builders like Dave Thomas, Jim Near, Steve Jobs and Bob Ansett have the opportunity to seize the markets that are being neglected.

There’s never been an excuse for not listening to the customer and today it’s more important than ever.

Google for entrepreneurs

A global research for entrepreneurs and business people from Google

This is an interesting project – Google have pulled together all their entrepreneurial resources into one page at Google For Entrepreneurs.

As well as being a handy resource for anyone building a business, it’s a great overview of the various programs Google and their partners are running around the world.

If you are looking at setting up a business or have a fast growing enterprise it might be worthwhile having a look at the resources Google have pulled together.

Squandering a reprieve

How did media companies miss the opportunities of the tech wreck?

ABC Radio National’s Background Briefing has a terrific story on the struggles of the Fairfax newspaper empire during the early days of the Internet.

One of the major themes that jumps out is how Fairfax, like many media and retail organisations, squandered the opportunity presented by the tech wreck.

The tech wreck was an opportunity for incumbents to claim their spaces in the online world, instead they saw the failure of many of the dot com boom’s over-hyped online businesses as vindication of their view the Internet was all hype.

As former Sydney Morning Herald editor Peter Fray said “In florid moments you could even think this internet webby thing would go away”.

For Fairfax the profits from the traditional print based business were compelling. According to Greg Hywood the current CEO, for every dollar earned by the company, 70c were profits – a profit margin of 233%.

The Internet threatened those “rivers of gold” and media companies, understandably, did nothing to jeopardise those returns.

Another problem for Fairfax was the massive investment in digital printing presses in the 1990s. These behemoths revolutionised the way newspapers were printed as pages could be laid out on computer screens and sent directly from the newsroom to the press itself which printed out pages in glorious colour rather than with smudgy black and white images.

Moreover these machines were fantastic for printing glossy coloured supplements and the advertising revenue from those high end inserts kept the dollars rolling in.

When the tech wreck happened, the massive investments in printing presses were vindicated as the rivers of gold continued to flow while the smart Internet kids went broke.

Fairfax’s management weren’t alone in this hubris – most media companies around the world made the same missteps while retail companies continued to build stores catering for the last echos of the 20th Century consumer boom.

In 2008, the hubris caught up with the retailers and newspapers. As the great credit boom came to an end, the wheels fell off the established business models and the cost of not experimenting with online models is costing them dearly.

Value still lies in those mastheads though as more people are reading Fairfax’s publications than ever before.

Readers still want to read these publications, one loyal reader is quoted in the story that Sydney Morning Herald should aspire to “being a serious international paper.”

That isn’t going to happen while management is focused on cutting costs to their core business instead of focusing on new revenue streams.

Somebody will find that model, had the incumbent retail and media organisations explored and invested in online businesses a decade ago they may well have found that secret sauce.

Now many of them won’t survive with their horse and buggy ways of doing business.