Tag: investment

Penny wise and pound foolish

Saving money on technology is often a bad investment as the V8 Supercars found

“We were penny wise and pound foolish” says Peter Trimble, Finance and Systems director of the V8 Supercars, about the IT setup he found when he started with the motor sport organisation 18 months ago.

The V8 Supercars were like many businesses who had outgrown their basic IT setup and were struggling as a result.

A touring organisation – “a travelling circus” as described by CEO David Malone – with 15 races in Australia, New Zealand the US has some fairly unique challenges as contractors, teams and a dispersed workforce put demands on the businesses which a basic small business system struggles to cope with.

What Trimble found at the business were employees struggling with cheap internet connections and antiquated, inadequate servers.

Focusing on the pennies and missing the bigger picture is a common problem when managements skimp on technology which leaves their staff spending more time on IT problems than getting their jobs done.

Basically the $80 a month home internet connection doesn’t cut it when you have more than two or three workers and the server that worked fine when those people were in the same office becomes a security risk when a dozen a people are trying to login over the Internet.

It wasn’t surprising the V8 Supercars management decided to go with a cloud computing service – in this case Microsoft Office 365 – and invest in proper, reliable internet connections.

What the Supercars found that being penny proud and pound foolish with IT doesn’t work for a business, office tech is an essential investment.

Paul travelled to the V8 Supercars in Launceston courtesy of Microsoft Australia. 

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Corporate palaces and the new Ceasars

An opulent corporate headquarters is often the indicator that management’s mind is on things other than customer service or shareholder’s return.

One of the key traits of managerialism is executives spending vast quantities of shareholders’ money on opulent corporate headquarters, is Apple the latest company to succumb to this disease?

Building a new headquarters is fun for managers. One company I worked for in the early 1990s was debilitated for months as executives spent most of their time moving walls, rearranging desk positions and changing lift designs to reflect their status as grand visionaries.

For the company gripped with delusions of management grandeur a flashy head office is the must have accessory. It’s the corporate equivalent of the Skyscraper Index and is almost as good a predictor that a change in fortunes is imminent.

Apple’s new headquarters is nothing if not impressive. Bloomberg Newsweek reports the building which, at two thirds the size of the Pentagon, will house 12,000 employees is currently estimated at costing five billion dollars, sixty percent over the original budget.

The plans call for unprecedented 40-foot, floor-to-ceiling panes of concave glass from Germany. Before the Cupertino council, Jobs noted, “there isn’t a straight piece of glass on the whole building?…?and as you know if you build things, this isn’t the cheapest way to build them.”

With over a $120 billion in cash, Apple can certainly afford to spend five or ten billion on new digs despite the grumbling of shareholders who have had to settle for a stingy 2.4% dividend from their shares.

The big question though for Apple shareholders though is whether a project like this indicates a company that has peaked with management more intent on building monuments to itself or its genuinely visionary founder rather than deliver returns to owners or products to customers.

On the latter point, there’s no evidence of Apple losing their way with their products yet, but it’s something worth watching in case management becomes distracted with their building project.

For the company I worked for, the distracted managers all vanished one day when the main shareholder of the Thai-Singaporean joint venture discovered they’d been fiddling the books. They probably needed to pay for the office fit out.

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Are Australians too risk adverse for startups?

Does a culture of property speculation hinder new businesses and startups?

Last week I had coffee with Clive Mayhew who chairs the board of Sky Software, a Geelong based student management cloud service.

Clive covered a lot of interesting aspects about Sky’s business; including the opportunities for regional startups, government support and his experiences in Silicon Valley during the dot com boom. All of which I’ll write up in more detail soon.

One notable point Clive raised was how he struggles to get Australian staff to take equity in the business – people want cash, not shares.

The question Clive raises is why and that question is worth exploring in more depth.

My feeling is that it’s a cultural thing related to property – four generations of Australians have been bought up believing housing is the safest way and surest way to build wealth.

As a consequence young Australians are steered into getting a ‘safe’ job and plunging as much money into accumulating property equity as early as possible. Just as mum and granddad did.

Even those who don’t want to play the property game are affected as property speculation pushes up prices and rents; the landlord or bank won’t accept startup stock to pay the bills so employees need cold, hard cash to keep a roof over their heads.

The other angle is tax and social security policies, through the 1970s and 80s various business figures used share option schemes to minimise their taxes and successive Australian governments have passed laws making it harder for businesses to offer these incentives.

Interestingly this not only affects the Silicon Valley tech startup business model but also hurts the aspirations of Australia’s political classes to establish the country, or at least Sydney, as a global financial centre.

Putting aside the fantasies of Australia’s suburban apparatchiks – which if successful would see the country being more like Iceland or Cyprus than Wall Street or the City Of London – it’s clear that the existing government and community attitudes toward risk are reducing the diversity of the nation’s economy.

That the bulk of the nation’s mining and agricultural investment, let along startup funds, comes from offshore despite the trillion dollars in compulsory domestic superannuation savings is a stark example of risk aversion at all levels of Aussie society, government and business.

For those Australian entrepreneurs prepared to take risks, the risk adverse nature of most people becomes an opportunity as it means there’s local markets which aren’t being filled.

The problem for those local entrepreneurs is accessing capital and that remains the biggest barrier for all small Australian businesses.

How this works out in the next few decades will be interesting, it’s hard not to think though that Australians are going to have to be weaned off their property addiction – whether this takes a harsh recession, retired baby boomers selling down their holdings or government action remains to be seen.

In the meantime, don’t base your business plan on staff taking equity as part of their employment package.

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Social media’s irrational exuberance comes to an end

With the tech industry’s irrational exuberance ending, the focus is now on building good businesses rather than worrying about hype, spin and fools with more money than sense.

Last week saw the annual Y Combinator demo day where the startups funded by the incubator get to strut their stuff and it appears the age of social media hype is over.

In the Wall Street Journal’s Digits blog, Amir Efrati reports Social is Out, Revenue is In as the companies showed off their income streams rather than the number of users which has been the measure for free social media apps.

That social media is out shouldn’t be surprising as the services have been tracking a standard Gartner Hype Cycle with a boom in services, coverage and investments that’s now turning into the inevitable bust and a fall into the trough of disillusionment.

Coupled with that fall for social media services are the disappointing stockmarket floats of Facebook and Groupon which have cruelled the enthusiasm for investing in tech startups with lots of user but not much revenue.

Last week’s headlines featuring Yahoo!’s purchase of Summly for $30 million and Amazon’s acquisition of Goodreads for an estimated $150 million show how the days of greater fools writing billion dollar cheques is over as more sensible valuations take hold.

Amazon’s purchase of Goodreads is more interesting than Yahoo! buying a teenage wunderkind’s venture in that Amazon is cementing its position at the centre of the global book publishing industry.

Goodreads has been one of the quiet social media success of recent years having built its subscriber base to over 16 million members sharing book reviews and reading lists.

The book review site is a natural fit for Amazon although the head of the US Authors’ Guild rightly worries the company is becoming a monopoly.

Of course the obvious retort to this is that someone else could have bought the site and Forrester’s James McQuivey speculates on why an established publisher didn’t do so much earlier.

This year’s Y Combinator Demo Day and the acquisitions of Goodreads and Summly show the era of irrational tech exuberance is over.

For good businesses operators and investors this is not a bad thing as everyone can now focus on building good businesses rather than worrying about hype, spin and fools with more money than sense.

Photo of Ashton Kutcher speaking at Y Combinator by Robert Scoble through Wikimedia commons

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Privileges and princelings

Many companies have developed a culture of executive privilege in an era of easy money.

A strange thing about Australian business reporting is that its often full of gossip and name dropping as any third rate scandal magazine.

In a perverse way, treating business executives like the Kardashians gives the average mug punter – and shareholders – a glimpse into how these companies do business. Like this story in the Australian Financial Review;

Hamish Tyrwhitt was unaware of the latest drama unfolding within the Leighton board as he relaxed in the Qantas First Class Lounge in Sydney on Friday morning.

Indeed, the contractor’s chief executive officer was busy chatting to former Wallabies captain John Eales while waiting to board a flight to Hong Kong where he was due to close a recent deal to build the Wynn Cotai hotel resort in Macau and enjoy the Sevens rugby tournament.

The timing was not good. Tyrwhitt had only just boarded the flight when the news broke that chairman Stephen Johns and two directors had resigned. Tyrwhitt was forced to change his plans and is expected back in Sydney for a board meeting convened this weekend.

Nice work if you can get it.

A few pages further in the day’s AFR is another gem;

One July evening about four years ago, off the south coast of France between Cannes and St Tropez, two men sat in the jacuzzi on the top deck of a 116-foot Azimut motor yacht. It was about 3am and the sea was rough. The spa water was sloshing about and had given the latest round of caprioskas a distinctly bitter taste.

Dodo boss Larry Kestelman was telling his good friend, M2 Telecommunications founder Vaughan Bowen, about the challenges of growing his internet service provider business.

It’s tough doing business when the spa waters are choppy. One expects better from a seven million dollar boat.

That second article raises another point that’s often overlooked, or unmentioned, when reporting Australian business matters.

on Thursday the 14th, something unexpected happened. At 12.30pm, after no activity all morning, shares in the thinly traded Eftel started to rise sharply. By the time the market closed at 4pm, Eftel had soared 44 per cent to 39.5¢. Someone with knowledge of the deal was insider trading.

Insider trading? On the Australian Security Exchange? Somebody had better call those super-efficient regulators who were responsible for Australia cruising through the global economic crisis of 2008.

Somebody obviously wanted their own 116ft luxury yacht or corporate box at the Hong Kong Sevens.

Both of these stories illustrate the hubris and privileges of corporate Australia and its regulators.

One wonders how well equipped these organisations are for an economic reversal when their leaders are more worried about caprioskas and their spots in the first class lounge.

We may yet find out.

First class airline seat images courtesy of Pyonko on Flickr and Wikimedia.

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You call that a graph?

A good chart can help tell a story, all too often though graphs are designed to mislead.

One way to illustrate a story is with charts. All too often though misleading graphs are used to make an incorrect point.

A Verge story on Groupon shows how to get graphs right – clear, simple and tells the story of how the group buying service’s valuation soared and then plunged while it has never really been profitable.

The vertical axis is the key to getting a graph right, cutting off most of the y-axis’ range is an easy way to mislead people with graphs. In this case you can see just the extent of Groupon’s valuation, profit and loss over the company’s short but troubled history.

Since its inception, The Verge has been showing other sites how to tell stories online, their Scamworld story exposing the world of affiliate internet marketing sets the bar.

Using graphs well is another area where The Verge is showing the rest of the media – including newspapers – how to do things well.

For Groupon, things don’t look so good. As The Verge story points out, the company’s income largely tracked its workforce which grew from 126 at the start of 2010 to over 5,000 by April of 2011. Which illustrates how the business was tied into sales teams generating turnover.

The spectacular growth of Groupon and other copycat businesses couldn’t last and hasn’t. The challenge for Groupon’s managers is to now build a sustainable business.

For investors, those graphs of Groupon’s growth were a compelling story. Which is another reason why we all need to take care with what we think the charts tell us.

Graph image courtesy of Striker_72 on SXC.HU

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Australia welcomes the multi generational mortgage

Australia starts to repeat Japan’s experience with multi generational mortgages. With a twist that might be more debilitating than the Japanese lost decades.

At the height of the Japanese property boom in the 1980s, the hundred year mortgage came into being.

Pushing payments onto children and grand-children was the only way home prices could continue to rise once they hit levels which the average Japanese worker could ever afford with a more traditional twenty or thirty year mortgage.

Twenty five years later Australia finds itself in a similar position as parents guarantee their childrens’ mortgages.

Repeating the Japanese mistake

While the Japanese looked to sticking their mortgages onto their kids and grandkids, Down Under the kids are fighting back and getting mum and dad to underwrite their unaffordable loans.

This weekend’s Sydney Morning Herald features in its property section the story of how Sharon and Graeme Bruce guaranteed their son’s and his fiance’s mortgage in Sydney’s inner suburbs.

While the story isn’t clear on the size of the deposit (which isn’t surprising given the SMH’s shoddy editing), it appears the Bruces’ have guaranteed around $300,000 so his son and future daughter-in-law can grab a five bedroom, 1.45 million dollar mansion.

One wonders what great businesses Matt and Hannah could build if mum and dad were prepared to stump up a similar amount to invest in a start up?

Australia’s property obsession

Sadly we’ll never know – in Australia, the smart money gets a job, pays off a mortgage and accumulates wealth through investment properties. What cows are to African tribesmen, negatively geared units are to the Australian middle class.

The hundred year strategy hasn’t worked too well for Japan, with a declining population those mortgages entered into a boom level 1980s values now don’t look so attractive and are one large reason for the nation’s lost decades.

In Australia, things aren’t likely to work so well either. The Baby Boomers and Lucky Generationals – those born from 1930 to 1945 – guaranteeing their kids’ and grandkids’ mortgages are relying on ever increasing property prices.

This is understandable given that few of them have any experience of long term stagnation, let alone decline, of property values but it leaves them incredibly exposed should the Aussie housing market slump.

Can an Aussie property decline happen?

Many Australians, particularly those with vested interests, maintain such a decline can’t happen but the prospects aren’t good as the SMH story shows;

The couple had attempted to buy a small terrace in Newtown but kept getting pipped at the post by other young professional couples. At a higher price point they had no competition.

Despite his parents’ generosity he said he would still need to rent out a few of the rooms to help pay for the mortgage.

So Matt can’t afford the mortgage. That’s not good starting point and one that could cost his parents dearly, which they don’t seem to care about much.

”Obviously my dad guaranteeing the loan was the only way we were going to purchase this,” Mr Bruce said. ”You need to have a 20 per cent deposit otherwise the banks want you to pay insurance … it’s a bit of a rort really.”

It’s fair to call mortgage insurance a rort – as it certainly is – but its purpose is to protect the banks should a mortgagee default and the financiers find themselves out of pocket.

With Matt’s parents getting him out of paying that insurance his bank has much better default protection, equity in his parents’ property.

Guaranteeing risk and misery

I’m not privy to the finances of Sharon and Bruce, but most of their contemporaries can ill afford to lose several hundred thousand dollars in home equity in their later years.

That is where Australia’s multi-generational mortgages could turn very nasty, very quickly as older Australians find themselves having to deliver on the guarantees they gave on behalf of their over committed offspring.

In Japan, it’s taken a long time for the population to realise their national wealth has been squandered on twenty years of propping up unsustainable property prices and economic policies.

One wonders how long it will takes Australians to realise the same has happened to them and what the political reaction will be.

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