Tag: investment

Now Facebook’s challenges really begin

How can Facebook build their revenues to justify the huge market valuation.

The long awaited float yesterday of social media service Facebook was a triumph for the business’ founder Mark Zuckerberg, his management team and advisors.

A market valuation of 100 billion dollars for a business started less than ten years ago is an impressive achievement and that sum now presents massive challenges for management who have to deliver on what investors believe the service is capable of.

At US$38 a share, Facebook is valued at 76 times its projected 2012 earnings of 50 cents a share, and nearly twenty times its expected revenues of US$5 billion. This compares to Google which trades at less than 15 times its 2012 profit estimate and six times revenue.

For Facebook to match Google’s value, the social media service is going to have to start making serious money beyond they can from charging egoists and corporations $2 a time for featured posts.

Google’s success was in moving out of their walled garden, had Google focused on advertising just on their own search pages the company would be earning a fraction of the billions they now make every quarter.

It’s difficult to see how Facebook can move off their platform into other sites and with users moving to mobile, the company will find itself even more constrained by Google and Apple who want to control access to their devices.

A more obvious course for Facebook is to maximise income from the massive data base of likes, preferences, relationships and opinions they have amassed from their users. How they do this will probably be the biggest challenge to Facebook’s management.

In monetizing their database, Facebook will push the limits of the law, tolerance of privacy advocates and possibly the patience of their user base. This is going to test a company that has in the past been slow to respond to public concerns.

Another challenge is perception – with such a massive valuation, Facebook is going to attract critics regardless of what they do.

A good example of this is the number of people criticising the float for not ‘popping’ on the stock market debut. At the end of the first day’s trading the stock had only gone up 0.6% and some in the media claimed this showed the IPO wasn’t the successful.

The idea a successful IPO is one that soars on the first day of trading is a naive view from a 1980s mindset. The idea was born out of the privatisation of British and Australian utilities in the 1980s and 90s where taxpayers were seduced by the idea of “free money” in exchange for selling community assets cheaply.

A ‘stag profit’ from a share that soars on its public float is theft from the existing shareholders and a transfer of wealth to insiders and their advisors.

Silicon Valley venture capitalists and startup founders aren’t dumb and have never fallen for that trick – investors pay dearly for stock in their ventures.

While no-one would call Mark Zuckerberg and his management team dumb they have a big job ahead of them finding revenue sources to justify the $100 billion market valuation. It’s going to be an interesting ride.

No exit

The problem of selling your business to fund retirement.

The men’s hairdresser down the road from me has hung up his scissors after twenty-four years.

The sign on his shop window apologizes and the shop itself is up for lease. Shortly there won’t be any evidence a long standing local business was once there.

Roy had no exit from his business and he sell the operation as a going concern.

For Roy his retirement will be funded solely out of his savings. If he’s lucky he’ll have saved enough of his income from the business for a comfortable retirement – unfortunately many small business owners they’ll eke out the rest of their lives on the pension.

Even for those who have planned for an exit, many of their plans have fallen over in the aftermath of the 2008 financial crisis.

It’s always been questionable whether Gen X and Y entrepreneurs could afford to pay the sums for the affluent retirement of Baby Boomer business owners but now the post 2008 contraction in lending means it’s even less likely retiring business owners like Roy will find someone to buy their businesses.

While the focus is on twenty something app developers selling their businesses for a billion dollars, the truth is that wealth for most business owners lies in the local newsagent, hairdresser or coffee shop owner being able to sell their operation for a reasonable return.

For many baby boomer business owners it’s going to mean working more years than they intended and sharply reduced retirement expectations.

Property values too are difficult. Many boomer businesses had the sensible model of buying the property their business occupies as a retirement nest egg.

Again those properties are too expensive for the new generation and the deleveraging economy means the outlook for property values isn’t good.

On every level, things are going to be tough for those wanting to sell businesses over the next decade.

Those who do get good prices for their businesses are going to be those doing something exceptional to gain attention with income and profits that make them stand out from the cloud.

Just being the best hairdresser in the neighbourhood or having a popular cafe isn’t going to be enough.

Hopefully Roy The Barber managed to stash away enough for a well deserved comfortable retirement.

Duly diligent

In an age of entitlement, we need to be careful of who we vote for, invest and do business with.

“Who would have thought our CEO didn’t have the qualifications we thought he had?” wonders the Yahoo! board.

“It seems we forgot to count the number of beds!” whines the cleaning contractor when challenged about a filthy hospital.

“We had no idea these people were corrupt,” growls the politician and former trade union official when confronted with proof its factional friends were misusing expenses.

An interesting phenomenon in the rise of the managerial classes over the last thirty years has been the group’s refusal to take responsibility for their failures.

Instead we see boards, investors, managers and politicians duck responsibilities that a reasonable observer would have thought is the reason for their healthy salaries, bonuses and perks.

One of the many conceits of 1980s thinking is the ideology of “personal responsibility” – to low paid workers and those at the bottom of society this mantra is applied ruthlessly.

The call centre worker who makes a mistake gets counselled or fired while the aboriginal kid who steals a can of coke is denied bail and goes to jail.

Let’s not mention the fines and sanctions that befall a small business owner who is too slow in submitting paperwork or forgets to pay one of the countless fees that make up today’s hidden taxation.

In boardrooms and Parliaments those doing the wrong thing rarely face any accountability; politicians caught misclaiming expenses are allowed to pay it back at their convenience while senior executives and captains of industry with a track record of mistakes continue to be employed in positions way beyond their abilities.

One exception to the that rule is former Tyco Chief Executive Dennis Kozlowski and his cohorts who looted their company through the 1990s. Eventually their excesses became so great that the CEO and his cronies ended up being jailed.

Not that this has rattled some of his cronies sense of entitlement. Former CFO Mark Swartz is suing the company for $60 million in retirement benefits and other monies.

I have a personal connection with Messrs Swartz and Kozlowski – I worked for their company in the mid 1990s and lasted nine months in a culture of cronyism and rorts where middle management enthusiastically aped the excesses of their senior executives.

One can argue I didn’t carry out my due diligence – a little bit of digging and more detailed asking around would have revealed Tyco’s institutionalised corruption and cronyism at the time.

I paid for this oversight by having my contract terminated in a public and humiliating way which drove me to set up my own business.

While working for companies like Tyco I saw them drive smaller businesses into the ground through slow, or non payment, of invoices. Strangely they always seemed to pay the corporate hospitality bills on time.

The weakness in today’s corporatist economy is that boards like that at Yahoo!, executives like Tyco’s in the 1990s and many of our business and political leaders have a sense of entitlement way beyond the value they add to their business, community or society.

Worse, the main lesson of 2008’s financial crisis is that massive government spending will protect these peoples’ bonuses and privileges regardless of their actions.

As investors, employees, suppliers and voters we have to do our due diligence on these people and organisations. We have the tools today to check the track record of those who want our vote, skills or products.

In today’s economy, we can’t afford to squander money or time on those who demand fat fees and salaries without delivering value.

At the cash register and ballot box, it’s time to do our due diligence.

Depreciating the future

We’ve become used to not planning for necessary costs. Will it eventually hurt us?

When I wrote my first book back in 1998, one of the things my editor and I did was look at the cost of buying and maintaining technology.

Regardless of how we chopped the costs up, it came up consistently that the purchase cost of a personal computer was around a third of the Total Cost of Ownership (TCO).

The TCO concept is something forgotten by people – be it a minister announcing a billion dollar purchase of jet fighters, a CEO boasting how he’s opened a hundred new outlets this year, or a family buying an investment property.

It was bought sharply into focus for me when one of my kids claimed he couldn’t use his government provided school laptop because the IT guy didn’t have the repair software to fix a problem.

Despite millions being spent on providing these computers, little has been allocated to maintaining them.

This is typical of the public education sector, early in the adventure of building a computer support business I learned that services to schools and universities were fraught with difficulties as many would infrequently receive a fixed amount for capital expenditure but nothing for ongoing maintenance. You see this in the conditions of buildings on many campuses.

Forgetting operating and support costs is something we all fall for.

Strangely motor vehicles are the only area we consistently factor in maintenance and running costs, probably because we get the fuel price shoved in our face every time we take the car for a drive.

While computers are becoming disposable items just like fridges and TVs were maintenance isn’t so much an issue given most last five to ten years before needing expensive repairs, its still true for many capital items.

There’s another aspect to forgetting costs – depreciation.

Depreciation allows us to factor in the declining value of our business assets yet I keep meeting people who treat depreciation as income or even an asset in itself. This is particularly true among real estate investors who prefer to buy newly built apartments for the higher depreciation deductions they can claim against tax.

Bizarre stuff and true bubble thinking where people think operating losses will be offset in the medium term by capital gains.

One of the aspects of 1980s thinking is that business costs like training and maintenance can be palmed off elsewhere or infinitely deferred. That isn’t the case.

In society and business, we’re seeing the effects of pretending these costs don’t exist. Somewhere in there lies opportunity.

The Free Myth

Free services often come at a cost of your time.

One of the biggest dangers to businesses is the belief that something is “free”.

As we all know, there is no such thing as a free lunch. When another business gives you something for free it’s safe to say there is a cost somewhere.

One of the speakers at the City of Sydney’s Let’s Talk Business social media event stated this when talking about social media saying “I can’t believe all businesses aren’t on Facebook – it’s free.”

Social media isn’t free. We all know the value services like Facebook are mining are the tastes, habits and opinions of their users.

For businesses, engaging heavily in Facebook or any other social media service hands over far more information about their customers to a third party than they themselves would be able to collect.

All of that information handed over to a service like Google or Facebook can come back to bite the business, particularly if a well cashed up competitor decides to advertise at the demographic the business caters to.

The core fallacy though is that these service are “free”. They aren’t.

Every single service comes with a time cost. Every social media expert advises the same thing, businesses have to post to their preferred service of choice at least three times a week and those posts should be strategically thought out.

That advice is right, but it costs time.

For a business owner, freelancer or entrepreneur time is their scarcest asset. You can always rebuild your bank account but you can never recover time.

Big businesses face the same problem, but they overcome this with money by hiring people for their time. In smaller businesses, this time comes out of the proprietor’s twenty-four crowded hours each day.

The computer and internet industries are good at giving away stuff for free, in doing so they burn investors’ money and the time of their users. The social media business model hopes to pay a return to investors by trading the data users contribute in their time.

While businesses can benefit from using social media services, they have to be careful they aren’t wasting too much of their valuable time while giving away their customers to a third party.

Often when somebody looks back on their life they say “I wish I had more time.” They’ve learned too late that asset has been wasted.

Wasting that unreplaceable asset on building someone else’s database would be a tragedy.

Bubble values

What Facebook tells us about the new tech bubble in Silicon Valley

The argument continues about Facebook’s purchase of photo sharing site Instagram.

One side claims a billion dollars for a business with barely any revenue and 13 employees is clear evidence of a bubble while the other side say its a strategic purchase that is only 1% of Facebook’s estimated $100 billion market value.

The latter argument is deeply flawed, comparing the purchase price against the value of other assets is always risky – particularly in a market where those underlying assets are being valued at the same inflated rates.

We could think of it in terms of a Dutch farmer in early 1637 claiming that paying a thousand Florins for a tulip is fine when he has a warehouse containing hundreds of them.

In reality, that farmer during the Dutch Tulip mania of the 17th Century held contracts for delivery; just as modern day investors held Collateral Debt Obligations.

Measuring value against other inflated assets is always dangerous and only fuels a bubble.

A much more concerning way of judging the wisdom of Facebook’s investment is against profit and revenue.

If we compare the purchase of Instagram against Facebook’s revenue, then the investment has cost them three months income.

Should we compare the acquisition against profit, Instagram has cost Facebook five years of profit at current rates.

Both of those numbers are very high and it indicates how big a gamble the Instagram acquisition is for Facebook.

It can be argued there is a lot of blue sky ahead for Facebook and that future profits and revenues will justify the Instagram purchase.

There’s also a very compelling argument that Facebook has to get into mobile services and Instagram does that.

Whether Instagram is worth three months income or five years profit to Facebook remains to be seen, but we should have no doubt it indicates we are well into Tech Boom 2.0.

Distorted priorities

How government subsidies distort industries like film, aviation and motor manufacturing

Every year the bureaucrats of the world’s movie production industry make their way to the Locations Show where governments compete to attract movie producers to their states with fat subsidies.

This year, the preparations for the Locations Show conference are overshadowed by the US government’s struggling with continued subsidies to the Export Import Bank, an organisation going by the wonderfully Soviet name of the ExIm Bank.

While ExIm and screen subisidies aren’t directly linked in the US – the bank being a Federally funded body that finances American manufacturing sales to foreign market while state governments compete for productions – both though illustrate the zero sum game of corporate welfare that leaves citizens poorer in the process.

Delta Airline’s law suit over Exim subsidies to Boeing gives us a real life illustration of how business loses in these battles for government largess.

When Delta Airlines goes to buy or lease a Boeing 777, they have to find funds at a commercial rate of interest. Air India on the other hand gets a subsidised rate courtesy of ExIm bank.

However if Delta chooses to buy an Airbus A330, European governments will offer similar subsidies to the American carrier.

So the subsidy system actually encourages American carriers to buys European jets rather than the US products. Nice work.

This distortion is something we see too in film subsidies, as government funds are siphoned off to support large corporate movie productions.

Nowhere is this truer than in Louisiana where the state embarked in 2009 to capture the so-called “runaway production” market of footloose movie projects that shop around the world for the most lucrative subsidies.

This has worked, with Louisiana based movie production expected to total 1.4 billion dollars in 2011 on the back of $180 million in subsidies.

One of the productions Louisiana grabbed in 2010 was The Green Lantern which came as a surprise to the government of the Australian state of New South Wales who thought Sydney had secured the project.

The Green Lantern loss was the nadir for the Australian film industry that ten years earlier had been overwhelmed with productions like The Matrix Trilogy.

At the time of the Green Lantern loss the industry appeared to be in its death throes, crippled by a high Australian dollar and disadvantaged by relatively lower government subsidies.

You’d have thought that riches to rags story had taught Australian politicians that dumb subsidies don’t work and may have actually damaged the local film industry more than it helped.

Unfortunately not.

Last week the Australian Federal government announced $13 million in support for production of Wolverine. The Prime Minister’s office gushed;

To attract The Wolverine to Australia, the Gillard Government granted the producers a one-off payment of $12.8 million which will result in over $80 million of investment in Australia and create more than 2000 jobs.

The payment effectively provided The Wolverine a one-off investment package equivalent to an increase in the existing Location Offset to 30 per cent.

Without this effective tax offset incentive, the producers of The Wolverine would not have chosen Australia as the location.

In the 1950s, it made sense to invest in the industries of the future such as aviation, movie and car manufacturing industries.

Unfortunately for our politicians in Washington, Canberra, Sydney and Baton Rouge, we don’t live in the 1950s.

Bubble economics

The fear of missing out drives most investment booms. Today’s Silicon Valley is no different.

You know you’re in an investment bubble when the pundits declare “we’re not in a bubble”.

A good example of this is Andy Baio’s defence of Facebook’s billion dollar purchase of Instagram.

Justifying the price, Andy compares the Facebook purchase with a number of notorious Silicon Valley buyouts using two metrics; cost per employee and cost per user.

Which proves the old saw of “lies, damn lies and statistics”.

The use of esoteric and barely relevant statistics is one of the characteristics of a bubble; all of a sudden the old metrics don’t apply and, because of the never ending blue sky ahead, valuations can only go up.

Andy’s statistics are good example of this and ignore the three things that really matter when a business is bought.

Current earnings

The simplest test of a business’ viability is how much money is it making? For the vast majority of businesses bought and sold in the world economy, this is the measure.

Whether you’re buying a local newsagency outright or shares in a multinational manufacturer, this is the simplest and most effective measure of a sensible investment.

Future earnings

More complex, but more important, are the prospects of future earnings. That local newsagency or multinational manufacturer might look like a good investment on today’s figures, but it may be in a declining market.

Similarly a business incurring losses at the moment may be profitable under better management. This was the basis of the buyout boom of the 1980s and much of the 1990s.

Most profitable of all is buying into a high growth business, if you can find the next Google or Apple you can retire to the coast. The hope of finding these is what drives much of the current venture capital gold rush.

Strategic reasons

For corporations, there may be good strategic reasons for buying out a business that on paper doesn’t appear to be a good investment.

There’s a whole host of reasons why an organisation would do that, one variation of the Silicon Valley business model is to buy in talented developers who are running their own startups. Google and Facebook have made many acquisitions of small software development companies for that reason.

Fear Of Missing Out

In the Silicon Valley model, the biggest strategic reason for paying over the odds for a business is FOMO – Fear Of Missing Out.

To be fair to the valley, this is true in any bubble – whether it’s for Dutch tulips in the 17th Century or Florida property in the 20th. If you don’t buy now, you’ll miss out on big profits.

When we look at Andy Baio’s charts in Wired, this is what leaps out. Most of the purchases were driven by managements’ fear they were going to miss The Next Big Thing.

The most notorious of all in Andy’s chart is News Corp’s 580 million dollar purchase of MySpace, although there were good strategic reasons for the transaction which Rupert Murdoch’s management team were unable to realise.

eBay’s $2.6 billion acquisition of Skype is probably the best example of Fear Of Missing Out, particularly given they sold it back to the original founders who promptly flicked it to Microsoft. eBay redeems itself though with the strategic purchase of PayPal.

Probably the worst track record goes to Yahoo! who have six of the thirty purchases listed on Andy’s list and not one of them has delivered for Yahoo!’s long suffering shareholders.

The term “greater fools” probably doesn’t come close to describe Yahoo!’s management over the last decade or so.

While Andy Baio’s article seeks to disprove the idea of a Silicon Valley bubble, what he shows is the bubble is alive, big and growing.

One of the exciting things about bubbles is they have a habit of growing bigger than most rational outsiders expect before they burst spectacularly.

We live in exciting times.

Hyping start ups for pleasure and profit

The Silicon Valley VC model is not sustainable for most businesses and industries.

Monday’s announcement that Facebook would buy photo sharing website Instagram shows the power of Silicon Valley investor networks and how they operate, we should be careful about trying to emulate that model too closely.

Intagram has been operating for 18 months, has 13 employees, has no prospects of making a profit and is worth a billion dollars to the social media giant. Pretty impressive.

A look at the employees and investors in Instagram shows the pedigree of the founders and their connections; all the regular Silicon Valley names appear – people connected with Google, Sequoia Capital, Twitter, Andreessen Horowitz.

The network is the key to the sale, just as groups of entrepreneurs, investors, workers and innovators came together to build manufacturing hubs like the English Midlands in the 18th Century, the US midwest in the 19th Century and the Pearl River Delta at the end of the 20th Century, so too have they come together in Silicon Valley for the internet economy.

It’s tempting for governments to try to ape the perceived successes of Silicon Valley through subsidies and industry support programs but real success is to build networks around the strengths of the local economy, this is what drove those manufacturing hubs and today’s successful technology centres.

What’s dangerous in the current dot com mania in Silicon Valley is the rest of the world is learning the wrong lessons; we’re glamourising a specific, narrow business model that’s built around a small group of insiders.

The Greater Fool business model is only applicable to a tiny sub set of well connected entrepreneurs in a very narrow ecosystem.

For most businesses the Greater Fool business model isn’t valid.

Even in Silicon Valley the great, successful business like Apple, Google and Facebook – and those not in Silicon Valley like Microsoft and Amazon – built real revenues and profits and didn’t grow by selling out to the dominant corporations of the day.

The Instagrams and other high profile startup buy outs are the exception, not the rule.

If we define “success” by finding someone willing to spend shareholders’ equity on a business without profits then these businesses are insanely successful.

Should we define business success by creating profits, jobs or shareholder value then the Silicon Valley VC model isn’t the one we want to follow.

We need to also keep in mind that Silicon Valley is a historical accident that owes as much to government spending on military technology as it does to entrepreneurs and well connected venture capital funds.

It’s unlikely any country – even the United States – could today replicate the Cold War defense spending that drove Silicon Valley’s development and much of California’s post World War II growth.

One thing the United States government has done is pump the world economy full of money to avoid a global depression after the crisis of 2008.

Some of that money has bubbled up in Silicon Valley and that’s where the money comes to buy companies like Instagram.

Rather than try to replicate the historical good fortune of others, we need to make our own luck by building the structures that work for our strengths and advantages.

What if Bill Gates had been born in Australia?

Can a society that puts property speculation before innovation succeed in the 21st Century?

Microsoft founder Bill Gates is today one of the world’s biggest philanthropists having built his business from an obscure traffic management software company to what was at one stage the world’s biggest technology corporation.

But what if he’d been born in Sutherland, New South Wales rather than Seattle, Washington? How different would things have been for an Australian Bill Gates?

The first thing is he would have been encouraged to study law; just like his dad. In the 1970s lawyers had far more status and career prospects than software developers in Australia.

Causing more concern for his parents and career counselor would have been his determination to run his own business. It’s far safer to get a safe job, buy a house then start buying investment properties to fund your retirement.

The Funding Drought

If Bill still persisted with his ideas, he’d have hit a funding problem. No bank wouldn’t be interested in lending and his other alternatives would restricted.

In the Australia of the 1970s and 80s they’d be few alternatives for a business like Micro Soft. Even today, getting funding from angel groups and venture capital funds depend upon luck and connections rather than viable business ideas.

Bill Gates’ big break came when IBM knocked on his door to solve their problem of finding a personal computer operating system; the likelihood of any Australian company seeking help from a small operator – let alone one run by a a couple of twenty somethings – is so unlikely even today it’s difficult to comprehend that happening.

Eventually an antipodean Bill Gates would have probably admitted defeat, wound up his business and gone to work for dad’s law firm.

Invest in property, young man

Over time a smart, hard working young lawyer like Bill would have done well and today he’d be the partner of a big law firm with a dozen investment properties – although some of the coastal holiday properties wouldn’t be going well.

While some things have changed in the last thirty years – funding is a little easier to find in the current angel and venture capital mania – most Australians couldn’t think about following in Bill Gates’ path.

Part of the reason is conservatism but a much more important reason are our taxation and social security systems.

Favoring property speculators over entrepreneurs

Under our government policies an inventor, innovator or entrepreneur is penalised for taking risks. The ATO starts with the assumption all small or new businesses are tax dodges while ASIC is a thinly disguised small business tax agency and assets tests punish anyone with the temerity to consider building an business rather than buying investment properties.

At the same time a wage earner is allowed to offset losses made in property or shares against their income taxes, something that those building the businesses or inventing the tools of the future are expressly forbidden from doing.

Coupled with exemptions on taxing the capital gains on homes, Australian households – and society – is vastly over invested in property.

Making matters worse, the ramping up of property prices over the last thirty years has allowed generations of Australians to believe that property is risk free and doubles in value every decade.

That perception is reinforced by banks reluctant to lend to anyone who doesn’t have real estate equity to secure their loans.

So we have a society that favours property speculation over invention and innovation.

Every year in the run up to Federal budget time tax reform becomes an issue, the real effects of negative gearing and other subsidies for housing speculation – the distortion of our economy and societies investment attitudes – are never discussed.

In Australia there are thousands of smart young kids today who could be the Bill Gates’ of the 21st Century.

The question is do we want to encourage them to lead their generation or steer them towards a safe job and an investment property just like grandpa?

Should Australia pass a jobs act?

Can legal reform help Australian start ups?

Last week the US President signed the Jumpstart Our Business Startups (JOBS) Act into law.

The US law seeks to make funding easier for new businesses by lifting the burden of regulations like the Sarbannes Oxley Act (SOX) and various other financial rules.

One of the main planks of the reforms is it changes shareholder thresholds, for instance allowing 2,000 investors rather than 500 maximum before it has to go public, and allows companies to advertise their shares subject to certain restrictions.

Whether it achieves the stated aim of allowing new innovative businesses to raise funds or triggers a new generation of “boiler rooms” and investor fraud remains to be seen but it begs the question of should Australia pass a jobs act.

The funding crisis

There is no doubt Australia has a business funding crisis. Before the global financial crisis of 2008, it was difficult for smaller business to access finance.

In the aftermath of the GFC, it became even harder for businesses to raise funds as banks withdrew from the small business sector, increased their lending rates and tightened criteria.

While this situation has eased somewhat, partly due to the entrance of new angel and VC investment funds, financing of startup and small business is patchy and still tough.

An Australian Jobs Act would make it easier for business to raise funds and well crafted one might encourage both self managed and public superannuation funds to allocate some of their investments into the startup and innovation sectors.

A Scammer’s dream?

One of the big criticisms is that it reduces investor protections; while it restricts investors with less than $100,000 in annual income from punting more than 5% of their income, it’s quite clear in a full blown mania the Jobs Act will enable plenty of shoeshine boys and self funded retirees will do their life savings.

The question of course is how well the existing regulations protect investors or the community given the financial disastersof 2008.

Despite tough rules like SOX and the Basel Agreements, massive institutionalised fraud occurred and it’s surprising there have been no reforms in these rules given the huge and unprecedented costs of rectifying the problems.

In an Australian context, it’s clear local regulations aren’t working when thousands of investors are defrauded by their financial advisors in financial planner led scams like Westpoint. So reform is due.

While it’s clear the legislation isn’t working, it’s also clear the Australian financial planning industry doesn’t have the skills or ethics to advise clients should a local Jobs Act be passed.

Perhaps we should be accepting there is risk in investing and an Australian Jobs Act could help by simplifying business rules and improving transparency in accounts rather than bogging business and investors down in masses of unread paperwork.

Is the US experience valid?

Looking at the US Jobs Act it appears the Silicon Valley insiders are finding ways to extend their business models, whether this is successful creating new American jobs or just enriching the good folk of Sand Hill Road will pan out in the next few years.

For Australia it’s important we reform our laws to make business and innovation easier though we need to be careful we don’t ape the worst aspects of the Silicon Valley business model.

You hold us harmless

How the terms of social media sites risk your assets and their business

Social media site Pinterest was recently caught in one of the ongoing quandaries of social media – the ownership of content.

The subject is tricky; social media sites rely on a vibrant community of users posting news and interesting things for their online friends.

Unfortunately many of things social media users post are someone else’s property, so almost every service has a boilerplate legal indemnity term like Pinterest’s.

You agree to defend, indemnify, and hold Cold Brew Labs, its officers, directors, employees and agents, harmless from and against any claims, liabilities, damages, losses, and expenses, including, without limitation, reasonable legal and accounting fees, arising out of or in any way connected with (i) your access to or use of the Site, Application, Services or Site Content, (ii) your Member Content, or (iii) your violation of these Terms.

Facebook have similar terms (clause 15.1) as do LinkedIn (clause 2.E) and Tumblr (clause 15). Interestingly, Google’s master terms of service only holds businesses liable for the company’s legal costs, not individuals.

Boilerplate terms like these are necessary to provide at least an illusion of legal protections for investors – those venture capital investors, greater fool buyers or punters jumping into the latest hot technology stock offering need a fig leaf that covers the real risk of being sued for copyright infringement by one of their users.

The risk in these terms shouldn’t be understated; by agreeing to them a user assumes the liability of any costs the service incurs from the user’s posts. Those costs don’t have to be a successful lawsuit against the service, it could be something as minor as responding to a lawyer’s nastygram or DMCA takedown notice.

Of course, none of the major social media platforms have any intention of using these indemnity terms; they know that the first time they go after a user all trust in the service will evaporate and their business collapse.

Somewhere among the thousands of social media services though there is going to be one that will pull this stunt. Strapped for cash and slapped with an outrageous claim for copyright damages, the company’s board will settle then send out their own demands to the users responsible.

Those “responsible” users – probably white, middle class folk sitting in somewhere in the US Midwest, South East England or North Island of New Zealand – will be baffled by the legal demand that requires them to file a defense somewhere obscure in California or Texas and will go to their lawyer friends.

When the lawyers tell them what it means their next step will be to their local news outlet.

The moment the story of a middle class person facing losing all their assets hits the wires is the moment the entire social media business model starts to wobble.

In many ways what the social media sites are trying to do is offset risk.

Risk though is like toothpaste. Squeeze the tube in one place and the pressure moves elsewhere.

By laying off a real risk by using legal terms the social media sites create new, even bigger risks elsewhere in their business.

The dumb thing is these terms really don’t protect the services anyway – it’s unlikely the typical social media user will have anything like the assets to cover the costs of a major copyright action by a rich, determined plaintiff.

It’s going to be interesting to see how many services still have these indemnity clauses in 12 months.

For the industry’s sake, the big players will need to have ditched these terms before that first dumb attempt to claim damages from users hits the wires.