Category: Investment

The benefits of an unsexy business

Being a startup in an unsexy industry can have its advantages believes Zerto founder Ziv Kedem

Being a startup in an unsexy industry can have its advantages believes one founder, particularly when your only competitors are sales and marketing focused corporates that struggle to innovate or execute on new ideas.

“There are some advantages of being in a non-sexy industry,” says Ziv Kedem, co-founder and CEO of Israeli company Zerto, “It means there are not too many people doing it and not too many can convince VCs this is a multi billion dollar market.”

Kedem was speaking to Decoding the New Economy during his recent visit to Sydney about Zerto, a disaster recovery software company – a distinctly unsexy business – which is his second startup following the sale of his first, Kashya, to storage giant EMC in 2006.

The advantage with being non-sexy is often the only competitors are large corporations, a prospect that doesn’t phase Kedem. “If the competition is only coming from the large vendors then there won’t be any innovation there,” he smiles.

Sales and marketing focus

Kedem’s view is many large companies are focused on sales and marketing, which means they don’t have the skills or the motivation to execute business plans in new sectors.

In many respects this echoes the experience of Seth Godin who expected Google becoming a competitor to his Knol business would be the fledgling company’s death knell. Instead Knol survived and Google’s notoriously poor attention settle upon another shiny, sexy industry to disrupt.

The problem for those non-sexy industries is raising investor money as the presence of a Google, Microsoft or Amazon in the market tends to scare VCs, private equity firms or retail investors away.

Crowdfunding downsides

Unlike his compatriot, John Medved, Kedem doesn’t see crowdfunding as a way around an investment drought as smaller investors are attracted to the ‘sexier’ businesses as well and raising the substantial amounts necessary for enterprise ventures is difficult on those platforms.

When a startup can find an investor, Kedem recommends not being shy about raising funds. “It’s rare to meet someone who raised too much,” he states.

Kedem also recommends investing in the team and looking for skills that the company will need in the future, not just today. Talking, to everyone from investors to customers to peers, is also important and he believes this is why Silicon Valley and Israel are so successful as technology hubs.

Believing in yourself

The most important aspect for an entrepreneur is self belief says Kedem, particularly when raising funds. “You’re doing the investor a favour when you go to them,” he says.

Ultimately that self belief is probably what everyone in business needs, particularly when facing a huge competitor.

Regardless of how unsexy your business is, believing it addresses a problem that people will pay to solve, may well be its greatest asset.

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Google focuses on the short term

Google’s reported divestment of Boston Robotics could mark a fundamental change in the business’ culture.

Just over two years ago Google acquired high profile robot developer Boston Robotics, at the time it appeared a major step both the search engine giant  and the industry.

Today, Bloomberg reports Google are looking at divesting Boston Robotics as the company is not proving to be fit into the company’s other divisions while management sees better revenue prospects in other ventures.

If the latter is true then the sale marks a shift in Google’s attitude towards long term investments. That may mark a turning point in the company’s development.

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Home delivery services fail to pass the Uber test

It appears the attempt to corner the home delivery market has failed

One of the group of businesses most affected by the downturn in Silicon Valley investments are the home delivery services.

For the last three years services such as Instacart and Doordash have attracted billions of investor dollars on the promise of become the “Ubers of home delivery.”

Like all Silicon Valley VC plays, the investors in these delivery services were prepared to throw vast amounts of cash at the businesses in the hope they could achieve a monopoly position.

“All these companies are massively subsidized to support growth and restrain growth of competitors.” Quartz magazine quotes Tim Young of San Francisco’s Eniac Ventures, “there’s a point at which the music stops, and investors are no longer willing to see their money go to those subsidies.”

That point seems to have been reached as it becomes apparent none of these businesses will dominate the industry which appears not to be so big after all.

History shows what happens when the money runs out as not being pretty. Already with cash problems looming, the companies are looking at ways to slow their cash burn through reducing contractor rates and slashing overheads.

Instacart is unlikely to survive and if the company does it will be as far smaller business than its investors hoped. Those are the risks when staking money in a tech mania.

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Cutting through Australia’s innovation rhetoric

Investor Steve Baxter talks about some of the strengths and weaknesses in Australia’s innovation statement

Four months ago, the Australian government launched its innovation agenda with the noble ambition to put the nation “on the right track to becoming a leading innovator.”

The keenly awaited innovation statement was seen as a defining the new Prime Minister’s agenda after two decades of complacent political leadership. At the launch of the paper Malcolm Turnbull said “our vision is for Australians to be confident, embrace risk, pursue ideas and learn from mistakes, and for investors to back these ideas at an early-stage.”

One of the early stage investors currently investing in Australia’s startup sector is Brisbane based entrepreneur, and Australian Shark Tank judge, Steve Baxter who spoke to Decoding the New Economy last week about where he sees the strengths and weaknesses in the proposals.

Beating the rhetoric

“Competitive threats are far more effective than rhetoric from a Prime Minister,” says Baxter in observing what really drives adoption and change while emphasizing that the announcement is a welcome shift,  “the change in messaging from the government has been very important. It’s having an impact and a future looking message has been fantastic.”

While Baxter is positive about much of the incentives on offer and the importance of changes to regulations around bankruptcy and treatment of business losses, he flags the the delay in implementing the tax incentives as being a problem.

Too focused on commercialisation

Baxter though has been a long standing critic of Australia’s research sector and the emphasis on commercialisation of academic work is in his view one of the Innovation Statement’s major weaknesses, “commercialisation is a concept that we’ve failed at. It’s dead. We’ve put so much money into it, it’s actually embarrassing. We need a new mindset towards it.”

“there are seven hundred million dollars of a billion going to the research sector. That’s not entrepreneurship. In fact universities and research institutes are the least entrepreneurial organisations you’ll ever come across.”

“We need more business model innovation, we’re seeing too many people in lab coats with synchrotrons, square kilometre arrays which we have to do,” Baxter states. “What we’re not seeing the Dropboxes and the Instagrams and the Facebooks and the Wayze’s, the cool stuff that doesn’t need a two hundred million dollar building.”

Thin pipelines

As an early stage invest Baxter sees the real challenge for Australia lies in encouraging individuals to launch their own ventures, “I don’t think we’ve done enough yet to prove we have an investment problem when it comes to early stage companies,” he says. “I don’t believe we have a lack of capital”.

For those starting their own ventures, Baxter sees the word ‘innovation’ as being a barrier in itself.
“The entrepreneurs I back aren’t those who say ‘I’m going to innovate’ but those who say ‘I can see a problem’.”

While Baxter doesn’t say this, the real challenge lies weaning Australians off property speculation and encouraging investment and risk taking, something that requires major tax and social security reform.

Sadly, the Turnbull government has abandoned the prospect of any immediate taxation reform and even the Innovation Statement’s more modest agenda is now in doubt as the nation’s febrile Parliament prepares itself for an early election.

Baxter’s views, and his optimistic but guarded outlook towards the Innovation Statement reflect the opinion of many of those in the Australian investment community, it would be a shame for the country if the current opportunities are lost for short term political maneuvering.

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Collapsing unicorns and business basics

The first tech unicorn to collapse, Britain’s Powa technologies, reinforces business basics for tech startups

UK e-commerce service Powa Technologies, once valued at £1.8 billion went into receivership after the lead US investor called in the £200 million loans it had made to the business.

It turns out most of 1200 corporate clients the company had claimed as clients were actually expressions of interest in the service rather than firm orders.

Powa now has the distinction of being the first of the tech unicorns to go broke – although it’s almost certain 2016 will see many of the companies with private billion dollar valuations join them.

While the focus on Powa’s demise will be the deceased unicorn aspect, the company’s story illustrates some business basics.

The key one is that sales only count when the money is banked, all too often cashflows, profits and valuations are inflated by booking income long before it’s received – if ever.

Another aspect is valuations are not cash in the bank, Powa may have been valued at £1.8 billion but it only had raised £250 million in capital along with a similar amount in loans. This was not enough to keep the business going at what must have been a spectacular burn rate.

While tech startups have unique aspects, the basics of business remain constant; Cashflow is king and adequate capital is essential. These are aspects managers, investors and employees need to watch closely.

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Telcos shifting up the stack

For the world’s telecommunications companies it’s a matter of diversify or shrink.

One of the Twentieth Century’s great rivers of gold was the telecommunications industry. As the world became connected, first by telegraph, then telephone and finally mobile networks, owning a telco licence became a path to riches.

Late in the century, the mobile phone was a spectacularly profitable device for telcos in the 1990s as consumers flocked to buy them and pay dearly for services, particularly SMS which was practically free to provide.

Just as the century was coming to a close things changed dramatically as the Internet became accessible to the general public and while data was still profitable, telco revenues started to fall dramatically. Then, early in the new century, the arrival of the smartphone disrupted the entire industry.

Becoming a dumb pipe

Twenty years later and the arrival of smartphones using data services has changed the economics of cellular networks, leaving the incumbents worried they are going to merely become ‘dumb pipes’ offering just a low margin utility.

Around the world incumbent telcos and mobile network operators have responded by moving up the value chain into managed services and cloud computing and one particularly interesting company in this respect is India’s Reliance Telecom.

Reliance has responded to the changes in its market, something made more problematic by India’s arcane and complex cellular licensing system, by strategically selling off various parts of its infrastructure and focusing on where it sees opportunity.

At a lunch in Sydney yesterday CEO Bill Barney of Reliance’s global network division was showcasing their cloud services for Australian customers and showed how the quest for profits is moving telcos into areas like data centres and managed services.

Emerging markets corridor

Barney argues that Reliance’s network, which spans South Asia, the Middle East and into Eastern Europe, gives the company a strong position in the “emerging markets corridor”. He also boasts the product the company offers allows easier development of smart services.

In this respect, the Reliance Global Cloud Exchange differs from similar plays like Telstra’s PacNet network across East Asia – which Barney previously headed – in that it offers services higher ‘up the stack’ making it easier for companies to deploy smart applications, something Barney sees as being particularly attractive to the media and financial industries.

While Reliance’s claims are yet to be tested in the market, the company’s shift to higher level services illustrates a struggle facing all telecommunications operators. To do this, Reliance and Telstra look to global networks and data services, Singapore’s Singtel tries its hand at media content in a similar way to Britain’s BT and Vodafone makes a strong Internet of Things play.

For each of these companies, diversifying into other fields makes sense however each strategy brings its own risks – in Reliance and Telstra’s cases this means competing with cloud services vendors like Amazon and Microsoft – that telcos haven’t been exposed to in their core markets.

Those core markets though are being disrupted and will never be as profitable as they were twenty years ago. For the world’s telecommunications companies it’s a matter of diversify or shrink.

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Australia’s missing technology leadership

Australia’s political and business leaders go missing as the nation tries to refocus its economy

This morning Cisco announced its latest global innovation centre in Sydney focusing on what it describes as Australia’s strengths in agriculture, resources and smartcities.

Along with with Cisco’s commitment to support the Sydney centre to the tune of 15 million Australian dollars and invest in local IoT businesses the project promises to bring together the data resources and skills of the University of New South Wales’ Engineering faculty, the Data 61 research agency and various state government departments.

Cisco’s launch though comes at a difficult time for the Australian scientific and research communities as just last week the national research agency, the CSIRO, launched another wave 0f job cuts immediately after restructuring the sector and even the location of the announcement is being sold off to property developers as the state government sees real estate ventures trumping technology investments.

Governments go missing

Even more telling during Cisco’s announcement was the poor presence by governments and corporate partners, the New South Wales state government at least sent along a minister and his Departmental head but the Federal government, despite its much heralded Innovation Agenda, was nowhere to be seen.

That lack of Federal government support is telling, particularly given regional and rural development is supposedly a priority of the current administration. An informed observer may be forgiven for thinking 21st Century technology investment would assist even the 1950s inspired project to develop Australia’s sparsely populated north but one supposes that grand vision extends to dams and highways.

The missing corporate links

Probably the most troubling omission is that of telecoms providers, agricultural and  resources businesses utilising the Internet of Things or M2M technologies need connectivity and the absence of either Telstra or the flailing government owned National Broadband Network means an important piece is missing from the push to connect these industries.

Once again both Optus and Vodafone – the latter probably having the best global M2M capacity of any provider – miss an opportunity to position themselves as an alternative provider to Telstra which proves whingeing about competition in the Australian market is a damn sight easier than putting some money down.

Notably missing as well is support from Australia’s corporate sector. While resources giant Woodside is a partner of the Perth centre, there’s little engagement from any other major company. The reply to a question by this writer to the panel about accessing the data held by the large pastoral companies illustrated what little engagement there is from key private sector stakeholders.

Fighting the innovation bureaucracy

To be fair to Cisco, these missing links are not the company’s fault and the delay in launching their Sydney centre was due to various shenanigans within Australia’s innovation bureaucracy beyond their control.

Hopefully Cisco’s Sydney centre will be successful – despite the fine words of Prime Ministers and other politicians Australian industry desperately needs some genuine leadership as the nation realises the safe certainties of the 1990s have passed.

For the moment though the lack of engagement in the technology industries by political and business leaders is striking. It’s hard not to think the country has regressed back to a smug 1950s view of the view, something not helped by all these events being almost overwhelmingly dominated by white, middle class middle aged men.

It’s time for Australia to start thinking differently. The nation’s business and political leaders can’t expect multinational corporations to drag the nation into the 21st Century.

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