Category: Investment

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.

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.

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.

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.

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.

Using city muscle to drive private investment

Can strategic public projects trigger private sector investment

Chattanooga in the US mid West introduced city broadband in 2008 in the face of legal challenges from the existing cable operators.

The operators lost in the courts and were forced to compete with the local, city owned power company’s network.

Now Wired reports Chattanooga is upping the ante by increasing the available throughput of their network to 10Gb.

While that’s good news for those businesses and households in Chattanooga that need those speeds, there’s a much more important effect that Wired points out.

Municipal broadband providers are raising expectations nationwide for what good Internet service means, forcing commercial providers to improve their infrastructure. And by increasing the amount of bandwidth available, they could be setting the stage for the creation of new, more bandwidth-hungry applications. This is how better service goes from a “nice-to-have” to a “you’d-better-have” for the country’s recalcitrant cable companies.

A few municipal projects could be the trigger to getting better services across the country. This is a model that could work in many other fields as well.

Riding the rails of the global economy

A US train ride illustrates the need to stimulate private and public investment

Irish economist David McWilliams reflects on how a train ride between Boston and New York illustrates how a lack of investment in the US and over capitalisation in China has affected the global economy.

A lack of public investment is hurting the US in McWilliams view and that’s exacerbated by a reluctance of the private sector to commit to new productive assets and projects. Weak investment affects household wealth and savings, it also means the low interest rates are encouraging speculation rather than economic growth.

Meanwhile in China, the nation’s massive expansion has created a global glut in manufacturing capacity. That makes business even more reluctant to invest in plant and equipment while creating risks for the commodities based economies like Russia, Brazil and Australia that feed that machine.

One aspect that McWilliams overlooks is another shift in the global economy – the shift to smaller scale manufacturing and automation, “real investment tends to be in big machines that make big stuff,” he says.

That investment in big machines may not be the economic driver they were half a century ago as building and maintaining the machines themselves are no longer labour intensive. Furthermore, the manufacturing of tomorrow may well be much more distributed and on a local, smaller scale.

McWilliams’ points though are well made. We need to be looking at how to stimulate private investment in productive assets while looking at the public investments that will enhance our economies and improve our living standards.

Does broadband really create an innovative economy?

Building a competitive nation is more than just rolling out broadband connections

How much does broadband really matter in developing a competitive and innovative modern economy? A corporate lunch with US software company NetApp last week illustrated that there’s more to creating a successful digital society than just rolling out fibre connections.

Rich Scurfield, NetApp’s Senior Vice President responsible for the Asia-Pacific was outlining the firm’s plans for the Australian market and how it fits into the broader jigsaw puzzle of economies across the region.

Like many companies in the China market NetApp is finding it hard with Scurfield describing the market as “chaotic”. This isn’t unusual for western technology companies and Apple is one of the few to have had substantial success.

Across the rest of East Asia, Scurfield sees them ranging as being mature, stable and settled in the cases of Japan, Singapore, Australia and New Zealand through to India where the opportunities and the challenges of connecting a billion people are immense.

Digital outliers

The interesting outlier is South Korea, one of the most connected nations in the world, where the promise of ubiquitous broadband isn’t delivering the expected economic benefits to the entire community.

In theory, South Korea should be seeing a boom in connected small businesses. As Scurfield says, “from a technology providers’ view this connectivity means you could do more things very differently because of the infrastructure that’s available.”

Global Innovation Rankings

Korea’s underperformance is illustrated by last year’s Global Innovation Index that saw South Korea coming in at 16th, just ahead of both Australia and New Zealand whose broadband rollouts are nowhere near as advanced as the ROK’s.

Making a close comparison of Australia and the Republic of Korea’s strengths in the WIPO innovation index, it’s clear the technology and engineering aspects are just part of a far more complex set of factors such as confidence in institutions, the ease of doing business and even freedom of the press.

Putting those factors together makes a country far more likely to encourage its population to start new innovative businesses that can compete globally. When you have a small group of chaebol dominating the private sector then it’s much harder for new entrants to enter the market – interestingly a private sector dominated by big conglomerates is a problem Australia shares.

Small business laggards

NetApp’s Scurfield flagged exactly this problem, “Korea is an interesting market in there’s about six companies that matter and from a competitive view those companies are extremely advanced, they have great technology and great people.”

“However what’s not happening across the rest of the country is this adoption isn’t bleeding into the broader community,” said Scurfield “Because of that I don’t see broadband connectivity as having a wide impact.”

That Korean small and medium businesses aren’t using broadband technologies to develop innovative new products and service in one of the most connected economies on earth raises a question about just how effective investment in infrastructure is when it’s faced with cultural barriers.

Certainly we should be keeping in mind that economic development, global competitiveness and the creation of industry hubs is as much a matter of people, national institutions and culture as it is of technology.

We shouldn’t lose sight of the importance of our people and institutions when evaluating the strengths and weaknesses of a nation in today’s connected world.

Researching the next generation of wearables

The Obama Administration teams with industry to develop a Silicon Valley based wearable tech hub

The Obama Administration teams with Apple, HP, Boeing and others to develop a Silicon Valley based wearable tech hub with $170 million in funding reports Venture Beat.

Over $17o million will be invested by the US government and its private sector partners in hybrid flexible electronics manufacturing research that may well underpin the next generation of wearable and embeddable devices.

For the US, its success in the electronics industry is based upon its strong research sector. Making the investments today will help the nation compete as the technology landscape evolves.

Winning the global fintech race

Winning the global fintech race – why history and focus matter

One of the things that strikes you when wandering around London’s Docklands district is the sheer amount of advertising for financial technology companies.

That London has established this position should surprise no-one, its civic and national leaders have been aggressive in maintaining the city’s position as technology has swept through the banking sector.

One of the notable things when interviewing the Chief Executive of London and Partners, Gordon Innes, two years ago was how engaged both the city’s business and political leaders were in the development of the town’s technology sector and the financial industry was a natural focus.

An example Innes gave of that engagement was the co-operation between the offices of the Prime Minister and the London Mayor where staffers meet on a monthly basis to agree on business and technology policy, which is then put into action by Westminster and the UK Parliament.

Poaching the Aussies

The benefits of that co-ordination and focus are global, with the London fintech sector attracting startups from as far as Australia.

Australia’s experience, or lack of it, in the fintech sector is notable. As the story linked above mentions, the UK Trade and Investment agency actively scouts out promising businesses while the local state and Federal equivalents sit on the sidelines (disclaimer: I worked for the New South Wales government on its digital economy strategy).

For Australia, the late entry into fintech doesn’t bode well. The country’s financial sector is overwhelmingly weighted towards domestic property speculation – a structural weakness seen as a strength by most Australians – and the country’s high costs make it tough for startups.

Defining a competitive advantage

High costs in themselves aren’t a barrier to a city’s success – London, New York and San Francisco themselves would be among the highest cost places to do business on the planet.

To justify those costs a city needs a competitive advantage and there’s little to suggest Sydney or Melbourne have anything compelling as a financial centre beyond a bloated domestic banking industry fixated on residential property.

Two of the arguments used to support Australia’s claims are it is on the doorstep of Asia and it is in the same timezone as the growing East Asian powerhouses.

Timezone myths

If timezones do matter in modern business, the sad truth for the Aussies is the powerhouses themselves – specifically Shanghai, Hong Kong and Singapore – are in roughly the same longitudes so any time differentials aren’t great.

Being on the doorstep of Asia is probably one of the greatest Australian myths of all – it’s actually quicker to fly from Beijing to London than it is to Sydney. London might be on the edge of Europe – one US entrepreneur once told me how they can get Spanish developers into the UK in an afternoon – and New York is the gateway to the United States however there’s little reason to go Down Under for any other reason than to visit Australia.

The power of history and focus

Comparing London to Sydney is useful though as it shows the power of history and trade routes. London became a global financial centre because it was the financial centre of a global empire just as New York is today and possibly Shanghai in the not too distant future.

For the Aussies, the trade routes aren’t so encouraging in indicating the country has a future as a financial sector. Even ignoring history, the commitments of governments and local corporations are at best half-hearted compared to their global competitors – as we see with London poaching Australian businesses.

One of the strengths in those global centres is a constant re-invention and the ability to adapt to changing circumstances – how China adapts to a rebalanced economy will define whether it remains a global economic power – and in the UK the government is looking at the next big things in biotech and the Internet of Things, two areas where it has strengths and can attract global investment and skills.

For countries and regions aspiring to be global players, they need not just to be playing to their own strengths but also to where the future lies and not be late entrants into the current investment fad.

Are small businesses too old and slow?

Does an aging small business population pose a risk to the economy?

Yesterday I hosted the second day of the CPA Australia Technology, Accounting and Finance Forum that looked at how the accounting profession is being affected by the changing technology landscape.

There’s plenty to write about from the day and how the accounting profession is facing technological change which I’ll write up shortly but one theme from the day was striking – that older small businesses owners are struggling to deal with adopting new tech.

Gavan Ord, the CPA’s policy advisor warns older practitioners are opening themselves to disruption and  the Australian business community is in general is at risk as older proprietors aren’t investing or embracing technology at a rate comparable to their overseas competitors.

Older small business owners

That older skew in small business operators is clear, in 2012 The Australian Bureau of Statistics found 57% of the nation’s proprietors are aged over 45 as opposed to 35% of the general population.

Even more concerning is many of those small business owners expect to retire with a 2009 survey finding 81% were intending to retire within ten years – it would be interesting to see how those ambitions changed as the global financial crisis evolved.

A risk to the broader economy

This blog has flagged the risks of an aging small businesses community previously, but Gavan Ord’s point flags another risk – that older proprietors being reluctant to invest in new technology means a key segment of the Australian economy is unprepared for today’s wave of technological change.

A key message from the CPA forum was that the shift to cloud computing is radically changing the business world as sophisticated data management, analytic and automation tools become easily available. Companies, and nations, that don’t take advantage of modern business tools risk being left behind in the 21st Century.

Stripe joins the unicorns

Payments company Stripe takes a big step with its investment from credit card giant Visa

Payment service Stripe joins the unicorn club as credit card company Visa becomes the latest investor reports the Re/Code website.

Two years ago this site interviewed John Collison, one of the Irish twins who founded Stripe about their mission to bring the payments industry in the 21st Century.

With the Visa investment it now means two of the world’s three major credit card companies are investors in Stripe, the other being American Express, and this shows the incumbent players are acutely aware of the changes happening in the payments world.

That credit card companies are investing in the businesses that threaten to disrupt their industry indicates the incumbents’ savvy management; while there are cultural and ethical barriers in trying to undercut the existing profitable products, having a stake in the new competitors gives companies like Visa and AmEx to remain relevant in a post credit card world.

For Stripe, investment from what could have been their major competitors not only takes some of the pressure off the the business but also opens opportunities for technology sharing and access to bigger markets.

Probably the most important thing for Strip with the Amex and Visa investments is they legitimise the business and the entire payments startup sector. It’s an important vote of confidence in the technologies and market.

For the Collison twins it also helps build better businesses, as John told Decoding the New Economy two years ago, “if we just building a business to take transactions from PayPal and get them onto Stripe, that’s not that interesting. What is interesting is if we can create new types of transactions that would not have existed otherwise.”

“By providing better infrastructure for anyone to build a global business. That will change the kind of things people will build.”

Now more people will be looking at what they can build on these payment platforms.