Category: Investment

Uber’s grand experiment

Uber’s losses raise questions of how far the loss making business model pioneered by Amazon can be pushed

Yesterday reports emerged that the icon of the disruptive economy, ride sharing service Uber, lost 1.2 billion dollars in first six months of this year.

Those losses show disruption doesn’t come cheap, although settling the damaging and costly battle with China’s Didi Chuxing will help the company’s cash burn.

Despite on track to lose at least two billion dollars this year, the company still has a substantial war chest having raised $8.7 billion dollars in debt and equity raisings over the last eighteen months.

While impressive, that war chest will only last four year at current rates and, given Uber’s already sky high 60 billion dollar valuation and the increasingly hostile Silicon Valley fund raising environment, it will be a relief to investors that the China battle appears settled.

There remains though an ongoing weakness in Uber’s business however with the company reportedly spending hundreds of millions a year in subsidies to drivers in key markets. How sustainable their business is remains to be seen.

In many respects Uber is following the Amazon example of beating down competitors by selling products at deep losses thanks to its access to capital and investors’ tolerance for building marketshare.

As we’ve seen with Amazon, that tactic has been wonderfully effective both in retail and in providing cloud services. For customers and the economy though, the reduced choices in the marketplace may end up not being in their interests.

Uber is an interesting experiment in how far the Amazon model can be pushed, for cities and states dealing with a deeply disrupted taxi and city transport network the results of that experiment may be telling.

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Spreading the tech industry’s footprint

The spread of the US’s tech sector shows the country’s industrial depth and strength, it also shows how other factors affect the spread of technology businesses.

Just how broad is the US tech industry? It’s tempting to think that most of the American tech sector is concentrated in San Francisco Bay Area with some offshoots in Seattle and on the East Coast but as this New York Times piece describes, the country has a range of high-tech industry clusters.

Like Silicon Valley itself many of those clusters exist because of other industries, research facilities or companies – Seattle being home to Boeing, Microsoft and Amazon being an example.

Another example of how other industries have influenced the development of industry clusters is shown in the example of Philadelphia.

I hadn’t thought have Philadelphia as having a tech sector until I spoke with Australian tech company Nuix about one of their key North American offices being in the Philadelphia suburb of Conshohocken.

When I observed that Philadelphia wasn’t the obvious place to set up, Nuix’s managers pointed out how the city’s pharmaceutical, medical technology and telecommunications provide a deep talent pool for tech companies along with the city’s location between New York and Washington DC being an advantage as well.

Philadelphia’s civic leaders have contributed to it with their Startup Philly program that offers services and incentives ranging from networking events through to a seed investment program.

VeryApt CEO Ashrit Kamireddi, one of the recipients of a Startup PHL angel round, describes the pros and cons of the city investment program and points out it was the factor in setting up their business there.

Prior to raising a $270,000 angel round led by StartUp PHL, my two cofounders and I had just graduated from our respective grad programs and had placed 3rd in Wharton’s Business Plan Competition. We could have settled our company anywhere, with New York and San Francisco being the obvious choices. For a startup, the initial round of funding is where geography is most critical. Most angels don’t want to invest outside of their backyard, which explains the natural tendency for startups to relocate where there is the most capital.

Kamireddi’s point about capital is critical, for tech startups finding funding is probably the most important factor in where the company is based.

Funding though isn’t the only aspect and for established companies, particularly those in the Bay Area struggling with high costs which is what the New York Times article focuses on in its example of Phoenix, Arizona.

The spread of the US’s tech sector shows the country’s industrial depth and strength, it also shows how other factors affect the spread of technology businesses.

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The moment Australia’s innovation dreams died

The day Malcolm Turnbull embraced negative gearing was the moment his innovation agenda died

It started so well but has ended in a whimper. I’ve just filed a story for Diginomica on how Australian’s Innovation Agenda died, strangled by the nation’s complacency.

While writing it, I found the moment Prime Minister Malcolm Turnbull’s credibility evaporated. At a media stunt in suburban Sydney, Turnbull and his treasurer Scott Morrison visited the Mignacca family who own two speculative properties and had just bought another for their one year old daughter.

That stunt illustrated everything that is wrong about modern Australia’s investment and taxation policies. The Mignacca’s could be improving their skills and education, they could be setting up a business to provide the jobs and growth that was the cornerstone of Turnbull’s re-election campaign or they could be developing innovative new products for their industries.

Instead they are speculating on property – and borrowing heavily to do it.

The Mignacca’s are doing nothing wrong and are responding rationally to the incentives in Australia’s tax system as well as doing exactly what their peer and parents did, speculating on property to secure their retirement.

Not that this strategy is without risk, like 85% of the Australian workforce both of the Mignacca’s jobs are in domestically facing service industries and in the face of an economic downturn the young couple could find their properties falling in price at the very time they can’t afford to keep them.

In ditching the Innovation Statement and adopting the comfortable rhetoric of his predecessors, Turnbull betrayed the Mignaccas, Australia’s economy and his own stated view about the nation’s property addiction.

Moreover, he killed any credibility he had in being able to recast Australia’s economic future.

One suspects history won’t be kind on Malcolm Turnbull and the day he travelled to the Mignacca’s home will go down as the moment he lost the future.

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Creating alternatives to the NASDAQ

Is the NASDAQ still the place for tech companies to list? Nuix’s Eddie Sheehy doesn’t believe so.

Does it really matter what stock market a company lists on? In my interview with Nuix CEO, Eddie Sheehy for the Australian Financial Review, the question arose about where the company will list for its expected IPO next year.

Sheehy’s response was clear, “I suspect we’d get just as good a float out of Australia now as we would anywhere else. In fact better, because I think our shareholders are better known, respected and trusted, there’s nothing that I’ve seen in London or Nasdaq that makes me believe we’d get a better outing.”

Until recently most tech startups aspired to listing on the US NASDAQ exchange and the reasons were compelling as the bourse has a strong technology focus meaning deeper pools of funds, more liquidity along with a community of investors and analysts who had a strong understanding of technology stocks.

The case for other exchanges

Now other exchanges are making their case for tech companies listing with them. The London Stock Exchange making a strong argument for prospective IPOs. Singapore, Sydney and many others have similar pitches for the business.

The problem in those exchanges is the lack of depth in the marketplace. Having a small selection of tech companies listed means limited focus from investors and analysts, it also risks having one or two successful companies dominating the index, as has happened with Xero’s listing on the New Zealand Exchange.

Xero also illustrates another problem with a listing on an exchange not familiar with the peculiarities of tech stocks at the company’s Sydney AGM a few weeks ago where an investor asked ‘when are you guys going to make a profit?’

Rod Drury, Xero’s CEO, was able to deflect the question but it showed how companies listed on exchanges where the the high growth, low yield model of tech startups are unusual. On the Australian exchange, this problem is exacerbated by the investor base being dominated by big, dumb institutions.

Changing perspectives

Nuix, among Xero and a host of other tech companies, are slowly changing the perspectives of those investors but the focus on yield and safety from both retail and institutional investors will remain an obstacle for ventures launching in more conservative jurisdictions.

Other factors are the stability, legal and taxation consideration of those jurisdictions. If stockholders are facing barriers realising their investors or the the domicile puts companies at a disadvantage then that country’s stock market won’t be preferred.

Ultimately though a company’s listing is about access to capital and liquidity. If companies like Xero and Nuix can get both at a reasonable cost by listing on the Australian, Singaporean or London markets, then that’s a choice for their boards.

It’s hard though to see the NASDAQ being knocked off its perch for moment, although it the US tech bubble does pop things may change.

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Entering an era of surpluses

Negative interest rates are part of a period of surplus resources that will test many businesses

With the global Zero Interest Rate Policy experiment failing, we’re now entering the era of negative interest rates with a quarter of the world’s central banks charging savers.

The world is flooded with money, but we also have surpluses in manufacturing, a surplus in most commodities, of energy and an increasing surplus of labor.

From Shanghai to Barcelona, the surplus of labor is beginning to be felt as industries become increasingly mechanised and the consequences of short sighted economic policies over the last thirty years begins to be felt.

That labor surplus is also driving the political shifts in Europe and North America as workforces are finding their living standards being pressured and their economic prospects dwindling. As a consequence, voters are looking for scapegoats – immigrants in Europe, the EU in Britain and Mexicans in the US.

Regardless of which scapegoat you choose to blame for the global economy’s uncertainty, the fact remains we are in a time where scarcity can’t be assumed.

This means business models that are based upon restricted supply are, in most sectors, under threat. The whole economics of scarcity becomes irrelevant when there are no shortage of suppliers around the globe.

In some fields, such as energy, technological change is seeing the dominant positions of oil companies, electricity generators and distributors being challenged in ways that wouldn’t have been thought possible a few years ago.

Even regulated industries where government licenses artificially controlled supply – like taxis, broadcasting and telecommunications – increasingly new distribution methods are changing the economics of those industries. No longer is buying a government license a sure fire way to big profits.

Right now, the imperative for businesses to find the areas where there is scarcity and supply constraints. For many industries that may be too difficult a transition.

Negative interest rates though take us into uncharted territory. How the global economy responds to virtually free and unlimited money is going to be an interesting experiment.

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Managing the circular firing squad

How Netsuite manages conflicting roles among its senior executives and directors

Earlier this week I had the opportunity to interview Evan Goldberg, the founder of Netsuite at the company’s Suiteworld conference in San Jose.

While one of the topics we covered was Goldberg’s support of the BRAC Foundation, I was also keen to discuss the company’s complex senior management and board dynamics.

Along with being the CTO, Goldberg is also Chairman of the Board which means CEO Zac Nelson answers to him on board matters but the roles are reversed in their executive management roles.

To make matters even more complex, Chief Operating Officer Jim McGeever is also the board’s President so he also answers to Nelson in executive matters while presiding over both of the others as a director.

“We call it the circular firing squad,” laughed Goldberg when I asked him about it. “We are all incredibly committed to the company and we get along really well. We get our egos out of the way and we just want to do the right thing.”

“Humour is a very important part of it,” Goldberg observes. “Fundamentally it has to be the right people for that to work. Three is a good number as you get to vote on the matter.”

So Goldberg’s view is Netsuite’s arrangement works because the three are friends and leave their egos out of decision making.

Goldberg’s observation is true of any successful business relationship – like a succesful personal relationship a thriving business partnership relies on respect and the individuals being able to give a little, or a lot, without bruising their egos.

Ultimately though, it’s interesting to observe how tolerant investors are towards such arrangements. As an independent, outside investor having too many Executive Directors on the board dilutes the critical management supervisory role of the board and that can’t be encouraging for shareholders.

Tech companies though get some slack from investors given their relative youth and market dynamics so it’s not surprising Netsuite gets away with this. The bond between the senior executives must also count as well.

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The benefits of being public

Both the public cloud and a publicly listed company are good things for a business says Netsuite’s Zac Nelson.

Both the public cloud and a publicly listed company are good things for a business says Netsuite’s Zac Nelson.

“Managing a public company is a great discipline and in some ways gives us an advantage over non-public company who don’t have to have discipline and make good investments,” says Zac Nelson, the CEO of Netsuite.

Nelson was talking to Decoding the New Economy yesterday at the annual Suiteworld conference, Netsuite’s annual gathering in San Jose.

The CEO’s comments are in contrast to a common view that being publicly listed company distracts a company’s management from focusing on long term objectives, a sentiment Nelson rejects.

“In terms of managing a public company I think it’s an important discipline, I think a lot of people are opposed to these SOX (Sarbanes-Oxley) rules but when I look at these rules I think they are just common sense. Are you managing your business right? You want to have control of your business so you aren’t blindsided.”

Probably the biggest advocate of taking companies private is Michael Dell who took his eponymous business off the markets three years ago and is now looking at doing the same thing with EMC in what will be the biggest IT merger in history.

Dell going private

Nelson doesn’t think Dell going private was a mistake though, “I saw Larry Ellison say it was one of the greatest business moves in the history of man, I’ll agree with Larry – he’s usually right on that stuff,” he laughed.

“The thing I see Dell doing that I understand is they are giving their smaller division more autonomy. Dell Boomi is going back to being just Boomi and Secureworks just went public. Certainly from a structural standpoint and business model innovation that makes sense and it’s what I understand.”

As a public company, Netsuite does come under scrutiny and one of the criticisms is that it continues to post losses, something that Nelson puts down to the treatment of stock options. In the last earnings report, the company claimed capitalising stock options added $30 million in costs and not including them would see the company reporting an eight million dollar profit last quarter.

“We’re cash flow positive, we generate over $140 million in cash,” Nelson says. “People are happy with it, we’re still investing. What we’re investing in this year is different to the past, we’re investing in services to enable our customers to invest in product.”

Integrating the stack

One of the advantages Nelson sees that cloud based companies like his have are integrated systems, “the client server world created this perspective that dis-integrated systems actually work – you have Windows, you have third-party apps – but what really works well are integrated systems.” he says. “Look at the most common system you guys use, called Apple, it’s an integrated end-to-end system. Same with Amazon, that’s what we’ve built.”

“The detour we took in the client-server world is still being taken in the software world, a lot of software people believe you can compile this stuff and it will magically work. No, it doesn’t. Integrated systems work better.”

Securing the cloud

One area he specifically sees where cloud services have an advantage in being integrated is with security, “a problem that large enterprises have that we to some degree don’t have is we have one system, we have five data centers. You look at some of these large enterprises and some of them don’t even know where some of their data centres are. How on earth do you secure that environment? It’s not a product problem, it’s a process and IT management problem.”

Nelson’s comments on security are a swipe at competitors like SAP and Oracle who are often criticised for having disparate systems.

With Suiteworld moving to Las Vegas next year, it will be interesting to see who’s taking bets against cloud services like Netsuite. Certainly with salesmen like Zac Nelson, they’re able to tell a good story. The key though is to show some profits in the longer run.

Paul travelled to Suiteworld in San Jose as a guest of Netsuite.

 

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