Tag: investment

Snapchat and the curse of Big Money

Snapchat shows that too much investment money is not always good for a growing business

Goldman Sachs fesses up to making a huge mistake about Snapchat, telling investors in an analyst note how they over-estimated the company’s potential and ability to execute on advertising opportunities.

There’s much to be said about Wall Street’s role in supporting Silicon Valley’s greater fool model and Business Insider has certainly been across how Goldman Sachs and its fellow bankers have been less than honest in their public dealings over the Snap float.

While the ethics and behaviour of Wall Street bankers and venture capital investors is a worthy topic for discussion, one of the notable things about Snap’s float is that it was too expensive.

The initial IPO valued the company, which at the time was reporting $500 million a year in losses, at $28 billion dollars. It’s not incidental the float incurred $85 million in advisors’ fees to Goldman Sachs and their friends.

A high valuation might be good for the early investors and employers – particularly those who sold in the initial ‘stag’ that saw the stock jump 60% on its first day – but for the company itself, and the later shareholders, it’s a disaster as the business’ management frantically struggles to find revenue streams to justify the market price.

This is the same problem that has crippled Twitter, instead of focusing on long term value to customers, users and shareholders, the company has desperately flailed around looking for quick hits to its revenue numbers.

While Twitter and Snapchat are outliers, the same problem faces smaller businesses which have attracted huge investments. The pressure to justify the money at stake becomes crippling and almost always damages the long term prospects of the company.

Too much investor money is rarely a good thing. As with much in life, quality and not quantity is what really matters for companies looking for capital.

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Champagne tastes and short runways

In an age of startup unicorns, it’s not surprising investors are being burned

One of the curious things about the Silicon Valley business model is how fundraising is seen as an end in itself.

Most business proprietors would be philosophical or mildly irritated if they’d had to give up equity or go into debt to fund growth, but in startup land a whack of money is seen as success in itself.

Sadly that money isn’t always well spent as the story of the free spending Guvera streaming service shows.

Over the company’s eight years the founders raised $185 million which ran out last week leaving the 3,000 small investors out of pocket.

That small investors were even involved in such a venture raises eyebrows and suspicions aren’t helped by a funds manager charging huge commissions for their services.

 

Just the use of a middle man like AMMA Private Equity – which happened to be run by one of the co-founders – should have raised concerns however the high commissions should prompted questions from the investors about advisors’ interest in getting them into a high risk venture.

In the current overheated startup space it’s necessary to be skeptical about many of businesses claims and the amounts of money being raised, as big pots of honey attract the flies.

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Freelancer and the sugar daddy problem

Attempts to create hands off marketplaces fail as the realities of managing millions of users becomes apparent

Last week Facebook’s Mark Zuckerberg announced the social media platform will be hiring three thousand content moderators following a string of shocking incidents on the company’s live streaming service.

Facebook were the most successful of the generation of businesses promising algorithms and the user community – coupled with common sense – would act as gatekeepers.

That was handy for their business models, as the reduced administration costs would mean a much more scalable and profitable business.

Managing users’ sins

Along with Google, AirBnB and Uber, Facebook found that relying on users’ feedback and their own algorithms wasn’t enough to cover the myriad of sins humans commit or one in a million edge cases which occur a thousand times a day when you have a billion daily users.

Even the biggest of the web2.0 companies, Google, found their core business being shaken as the limits of algorithmic advertising were explored and advertisers didn’t like where their brands were appearing.

Most striking was AirBnB who quickly found ignoring aggrieved landlords didn’t work when you’re a billion dollar company. Uber, Facebook and Google have similarly found the “we’re just an agnostic distribution platform” doesn’t fly when you’re boasting millions of users.

Freelancer and the sugar daddies

Which brings us to Freelancer, the labour sites were always problematic in this space as services are rife with ripoffs, misunderstandings and inexperienced operators – on both the seller and buyer side.

Another problem though which seems to be appearing is the advertising of adult services on this site, such as this advert which appears to be either an advert for a sugar daddy or a webcam performer – the mangled English makes it hard to tell.

Bizarrely a Freelancer administrator has removed some of the advert’s content but has left the post itself up.

Clicking on the related links brings up a whole range of strange projects including someone who needs a photoshop expert to insert an individual into sex photographs.

Holding the service harmless

It’s hard to say whether these posts comply with Freelancer’s Terms and Conditions as they are the usual vaguely written screeds seeking to shift all responsibility away from the company which have become the norm with online services.

The reputational risk to Freelancer though is real, as company listed on the Australian Stock Exchange it has public investor base and, given its competitive market, it has to appear respectable to user – becoming a Tindr for adult performers – is probably not where organisation would like to be positioned.

Hitting the profit margin

Ultimately though Freelancer’s problem in this space is the same as most online platform services, the promise of negligible administrative costs is an illusion as managing a large user base brings up legal, regulatory, reputational and even political risks as Facebook is finding.

Like many of the early promises of the internet, the idea of a hands off platform where users do the work while owners sit back and pocket profits has gone. Where there’s people and edge cases, there’s risk and those profits may not be as great as they appear.

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Coping with ignorance in a dysfunctional market

Startup investing involves working in ignorance, rather than managing risk says one veteran funds manager

“We discount uncertainty and ignorance too much,” says funds manager Jack Cray.

Cray was giving his From Risk to Uncertainty to Ignorance presentation at Sydney’s North Shore Innovation Network where he went through some of the lessons from a career of managing funds in North America and Australia.

Groupthink is one the great risks Cray sees in the investment community with funds managers tending to recruit from a monoculture drawn from economics and finance degrees. “Diversity amplifies signals,” says Cray.

Compounding the groupthink is the focus on risk, believes Cray. Risk can be managed while the other factors in investment – uncertainty and ignorance – can’t.

Traditional investors, particularly those in the public equity markets, understand risk well. However those established models also mean create process driven risk averse institutions.

In the Uncertainty field, typified by the private equity markets, fixed models don’t work so well as a consequence investors have to be more risk tolerant and patient as they deal with a world where things can’t be assumed.

And then there is the world of ignorance where no-one can quite be certain of what’s going on, which is typical of the tech startup field. In this space, investors have a high risk tolerance and are often muddling through while being buffeted by unexpected factors.

“To succeed in a world of ignorance you have to be honery and less concerned about certainty,” Cray observes with a wry smile.

This explanation makes a lot of sense when looking at why institutional investors struggle with the startup world and why private equity investors – largely a group of financial pirates – are so profitable.

In answer to my question that saying startup investors are operating in a world of ignorance implies that sector really is an insider game, Cray was ambivalent – it can be, but the endorsement of a major VC or highly regarded investor will by its nature be seen as information in a field where everyone is short of data.

Cray also had an interesting perspective on how markets and pundits see change differently, “investors overlook while futurists overcook.”

Speaking to Cray after the event, he had some thoughts about the internet itself, while it’s a great source of information it also creates too much noise. Cutting out that noise is essential for a good investor.

When it comes to investment all of us are dealing with different degrees of ignorance, Jack Cray’s views were an interesting insight into how managing a stock portfolio or picking ventures is more than just understanding risk.

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The trouble with crowdfunding

Crowdfunding is a useful tool for some ventures, but it isn’t without its risks

This story originally appeared in Business Spectator in July 2015, with the recent crowdfunding stories I thought it was worth revisiting.

Last week home automation start-up Ninja Blocks announced it was closing down after three years, two successful Kickstarter campaigns and burning through $2.4 million of investor funding. This follows the winding up of smart lighting venture Moore’s Cloud late last year.

Both companies relied heavily on crowd-funding to raise their profile and attract capital for their projects. The two Ninja Blocks campaigns raised a total of $800,000 to fund their two products while Moore’s Cloud fell short of the target they set.

Former Moore’s Cloud CEO Mark Pesce was bitter about the company’s failure to meet its target, telling Technology Spectator last year he would rather eat bullets than go through a Kickstarter campaign again.

Not better, just different

“People say it’s a better way of getting investors, it’s not better it’s just different.” Pesce said in reflecting on a campaign that raised $350,000, only half the amount needed to get the product onto the market. “If you do a crowdfunding campaign you have to be customer-focused from Day One. You have to do a marketing campaign and customer support from the first day, you have to build the customer infrastructure first.”

Ninja Blocks’ former CEO Daniel Freedman agreed that ultimately crowd-funding is not the best place to raise capital for a new start-up, “Kickstarter is a great place to launch a product but I don’t think it’s a great place to launch a company,” Freedman also told Technology Spectator last year.

“I think there’s two different things there,” Freedman said. “Unless you get several million dollars like some of the larger Kickstarters have, you need to get external funding. If you were to price in everything you need to do to get a product worldwide shipping then you’d be selling a two hundred dollar product for six hundred dollars.”

Impeccable qualifications

Ninja Blocks boasted an impeccable pedigree for a start-up, being a 2012 graduate of the high profile Sydney Startmate program that included a $25,000 cash for a 7.5 per cent stake in the business. The company also received a million dollars in seed funding that year from a group of prominent Australian investors that included Atlassian founders Scott Farquhar and Mike Cannon-Brookes.

The company went on to raise another $800,000 through two Kickstarter campaigns and last year secured a further $700,000 from investors including Singtel’s Innov8, Blackbird Ventures, and the prestigious 500 Startups project to expand into the United States.

Despite the resources and high profile backers, Ninja Blocks still ran out money. Something that didn’t surprise 500 Startups’ founder Dave McClure who responded to the news on Twitter with “not all startups will be unicorns and making things is hard.”

Hardware is hard

Co-founder and director of Australian crowd-funding site Pozible, Rick Chen agrees with McClure’s views, “startups needs to realise building a hardware product is difficult, they need to understand how the hardware developing cycle works, get their hands dirty and do some actual work to make sure things are in control before crowd-funding.”

The complexities of running a hardware start-up were acknowledged by Freedman during his interview with Technology Spectator last year, “there are things you would never have thought about when you ship a product worldwide, things like certifications, recycling programs in Europe and foreign language manuals.”

However, Chen sees crowd-funding as having a role in funding hardware start-up projects, particularly in protecting the founders’ equity in the venture. “Crowdfunding offers a unique way to build and engage with an audience base for hardware companies, it is a fantastic tool if used well. The core value of a crowdfunding campaign versus investment funding is those supporters and early adopters of your product and of course not losing any percentage of the company.”

Crowdfunding lessons learned

For the investors in Moore’s Cloud and Ninja Blocks they may well now be thinking it would have been better to insist on that work being done earlier, however start-ups are a risky business and most will fail, something that Chen points out.

“Crowd-funding is not easy, it combines fundraising, product launching, marketing, PR and other things all in one package, it requires a lot of energy to plan and execute, and the result is unpredictable,” Chen states. “But I don’t think crowd-funding itself adds any extra dimension to the difficulties of creating a start-up, all the process is required with or without a crowd-funding campaign and the result is as always, unpredictable.”

While crowd-funding is still going to be attractive to capital starved entrepreneurs, many start-up founders and their investors will note the lessons of Moore’s Cloud and Ninja Blocks’ failure. Crowd-funding certainly isn’t the simple path to raising funds.

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Crowdfunding the energy revolution

As technology changes so to do business and investment rules. The solar energy market is a good example.

“We have no shortage of investors,” says Tom Nockolds of Sydney community solar farm group Pingala in an Australian Broadcasting Corporation’s report on small business power projects.

The ABC’s report focuses on Bakers Maison, a suburban Sydney bakery that raised 400,000 dollars to extend its solar solar electricity system to slash its power bills and promises investors a seven percent return on investment.

Seven percent is very good in these days of low yields so it’s not surprising investors are lining up for projects.

It’s also an indictment on the modern banking system that smaller businesses like Bakers Maison have to issue debt directly to the market rather than getting a loan, which would have been normal a generation ago but today Australian banks would rather lend to property speculators than productive businesses.

This isn’t to say such fund raising is without problems as there is a real risk of fraud which Australia’s prescriptive fund raising laws are designed to avoid, even at the cost of stopping genuine investments.

“We’ve had to duck and weave our way through the regulations to set up this kind of operation,” says Warren Yates of Clear Sky Solar Investments – another volunteer group – about the laws which were developed after the financial scandals of the 1960s mining boom and the 1980s entrepreneur period.

As a consequence, the ABC story points Australia is lagging jurisdictions like Germany, Denmark and Scotland in developing these schemes.

With the banking system having left the field of funding growing businesses and responsibility largely falling on volunteers to provide services, reforms encouraging community crowdfunding need to be developed to provide capital to industry and local initiatives.

That many of the current reforms in this area such as America’s Jobs Act or Australia’s Innovation Agenda focus on a narrow set of industries – specifically the tech startup sector – which means we’re missing most the value in an evolving economy. A bakery, factory or hotel deserves the same investment advantages as the next potential tech unicorn and they could employ just as many people and deliver even more benefits to the broader economy.

New technologies have always demanded new investment and business rules and we’re seeing those pressures developing today, all of us have to demand regulators and politicians pay attention to the changing needs of our economy.

With investors clamouring for new opportunities and businesses wanting capital, it would be a tragedy to miss the possibilities of today’s technological, financial and energy revolutions.

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Juicing innovation

The Juicero’s expense, built in obsolescence and unnecessary waste is emblematic of everything that’s wrong with the current Silicon Valley culture.

Every tech boom has its excesses and it’s hard to go past the Juicero as the most egregious of today’s mania.

A number of high profile investors, including Google’s venture capital arm, have poured $120 million dollars into the internet connected device that squeezes juice from pre-prepared pouches of pulped fruit and vegetables.

Bloomberg found the devices don’t a great deal as the juice can be squeezed out of the packs by hand, which is just as well given the microchipped pulp containers can be disabled by the manufacturer.

While the Juicero aims to be the juicer equivalent of the Keurig coffee capsule, the device’s expense, built in obsolescence and unnecessary waste is emblematic of everything  that’s wrong with the current Silicon Valley culture.

The fundamental question of any business idea is ‘what problem does this solve?’ It’s hard to think of anything the Juicero fixes.

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