Thursday, 26 March 2015

Of entrepreneurs and capital raising . . . free advice from the IBCyclist

I don't care what type of entrepreneur you are, whether it's tech, mining, pharmaceutical, mechanical or financial I just need you to answer some very straight forward questions in our first meeting.

1. Opportunity: What market are you attempting to satisfy? 

It's an easy question, but you'd be surprised how many fledgling companies don't state it right up front. I've seen some great presentations, and they usually start with a clear value proposition:

Did you know that the average amount spent on a taxi fare in New York is X? Total income for the industry, last year was X.

Did you know that the average automobile has X meters of copper wire in it? And if every third Chinese or Indian household owned a car we'd require X amount of new copper production . . .

Obesity is the single biggest killer of adults under the age of retirement. Spending on related solutions is likely to grow at X% over the coming decade?

2. Concept: What are you offering that satisfies the opportunity you identified? 

Show me your solution. Don't use words when pictures, maps and numbers will best highlight things.

Our app is a unique solution that enables the user to connect with the nearest taxi directly and offers passengers a rebate for frequent use.

The "Big Deposit" copper mine can be operating within 18 months and produce ore at a rate of . . . 

"Nofatsilose" is currently in stage 2 of clinical trials and we hope to confirm that it reduces cholesterol by X% in the first year of use.

3. Demonstrate: Walk me through the process.

How do we get the solution working. Give me a timeline and state various hurdles, be they regulatory, physical construction or software testing.

Here's a mock-up version of our app. It's taken 12 months to get to the beta phase and $100k. As you can see the user's location is automatically identified, and all they need to do is select a destination either from their address book or by inputting it in the address bar like this . . . 

This map shows the mine location. You'll notice the proximity to transport, both road and rail. The pit depth for stage one needs to be . . . 

If we pass stage 2 the drug goes to final FDA approval which should take 12 - 18 months. In that time, we'll need to conduct some additional studies . . .

4. Funding: How much do you already have? How much do you need? How much cash are you burning per month?

Entrepreneurs need to demonstrate they have a grasp on their business costs. Don't ask me for a million dollars today if you need to come back in 3 months for more because you didn't understand the risks of cost blow-out, etc.

The app needs 300k users to breakeven. We estimate total operational costs (developers, testing, etc.) in the first 18 months to be $850k. In addition using recent data from X, Y or Z, we're estimating those first 300k users to cost us $4.50 each. That will be attributable to marketing and database maintenance. All in we're raising $1.5m, allowing us a contingency . . . 

The basic mine infrastructure is likely to cost $40m, but that excludes a rail track extension for the last 9km. That costs $3m, but the weather means we need to double that contingency if the rains fall early. We have $10m in cash, which will last us nine months . . . 

We have $30m in cash on hand. The final trials will cost $38m, but if the regulator needs extra evidence we don't want to be coming back to the market in the middle of the process. We think it makes sense to raise an additional . . . 

5. What's in it for the investor?

What is the current capital structure (who owns the business)? How long before you breakeven? What is the dilution effect of the capital raising you're conducting? If you have to raise money again do I get first right of refusal on new shares?

Post breakeven we estimate that each new users will generate around $2.50 of income. Of that roughly 30% will be needed for operational costs and 20% for ongoing marketing. In terms of valuation comparables . . . 

Total cost per ton of Ore will be XXX. That means we'll be the lowest cost producer in the market. Stage 1 is likely to be exhausted in 3 years at which time we will have shipped XXX . . . .

Once FDA approval is granted, we estimate marketing costs (via conferences, literature, etc.) to be approximately $26m when implying the same model Fizer used for it's inferior product that launched in 2008. That means that once we're on the approved list we'd expected take-up in the EU and the US of around 50m patients at a cost of . . . 


Obviously the more facts and figures you have, the better it is and the better your credibility. Some entrepreneurs have an advantage in that they come from a very numeric background. If you're more about style, then you need to have a good CFO that you can toss to in case deep divers (like myself) start throwing out detailed questions. It's not the end of the world if you can't answer the questions, but you do need to show that you understand what's being asked.

Finally some words on your presentation.

If you're a hedge fund and I'm an institutional investor I don't want to come to your office and see six traders dressed in shorts playing air hockey because nothing is happening in the market today.

If you're a miner and you've just entered the car park in a $300k Ferrari I'm going to wonder why you need my money.

If you're tech looking for $1.5m it's probably best if you're not wearing a $75k Patek Philippe and $1500 John Lobbs, Christian Louboutin's or Jimmy Choo's. I'm going to ask why you're not funding this yourself.

If you're a pharmaceutical . . . . don't get me started.


Tuesday, 24 March 2015

BBY Disruptive Lunch: CBA's Kelly Bayer Rosmarin

It's sometimes easier to write about the "less" polished presentations we get at the BBY Disruptive Lunches then those that are focused and tested. Commonwealth Bank's (CBA) Kelly Bayer Rosmarin presented a cogent and polished summary of that institution's approach to disruptive technology generally and specifically to the digital client interface.

Bayer Rosmarin's engineering background was to the fore as she set limits on the subjects she was going to discuss and stuck to those parameters. Part of the charm of these lunches is the way that some of the start-ups meander through their business cases almost rethinking what they're saying as they go. I don't expect young companies to have laser sharp focus. When they do, as was the case with someone like Catapult Sports it can be riveting, but it's not always necessary. Take Pocket Book's (19  Feb 15) offering last month, that to me was notable because I got the sense the team was still discovering their capabilities and a best avenue of action.

Bayer Rosmarin sought to deal with disruptive technology and CBA through the lens of three distinct examples: Crypto Currencies, Cognitive Computing and Cyber Crime.

1. Crypto Currencies

Would crypto currencies exist without the 2008 financial crisis? Security, trust, convenience and efficiency, all areas severely tested by the crisis. The collapse of major banks severely tested the faith of people during the GFC. Historic examples from past economic adventures (think Weimar Germany, South American banana republics, African hyperinflation) provided fertile ground for Bitcoin (and other crypto currencies) in recent years.

Bayer Rosmarin's Bitcoin case study was a gentle debunking of the currency.

Firstly, coming from the angle of a large bank the security aspect of Bitcoin seemed to CBA somewhat counter-intuitive. Approximately 10% of Bitcoins would never be used because the security system functioned on the basis of a one-time passcode. Lose that, and you lose your ability to redeem your "money". Imagine (she suggested) if CBA froze your account permanently if you lose a passcode. The bank would likely to suffer an outflow of customers. How then could Bitcoin pass a convenience test?

Secondly there are a limited number of Bitcoins. I was somewhat confused by the CBA argument here because as we know Bitcoins can be split into fractions down to (I believe) nine decimal places. Additionally the raison d'etre for most Bitcoin believers is that the cap on the eventual size of the Bitcoin pool serves as a hedge against their concerns about central bank incompetency and associated currency debasement.

Thirdly, and more convincingly Bayer Rosmarin pointed to concerns as to the security of Bitcoin exchanges given various scandals that have erupted in the last two years. It's hard even for ardent Bitcoin enthusiasts to rebut this because the evidence is strong that this has been the weakest facet of the currency.

Lastly, Bitcoin according to CBA lacks differentiation. In fact, anyone can start a crypto currency. I think the suggest here was that these currencies might sink or swim as a group. If one currency was exposed as having certain vulnerabilities, then the group was likely to suffer because the flight to safety element of say out of Euro and into Swiss Francs wasn't available.

Not everything about crypto currencies is negative. Various protocols for payments were worth exploring. CBA have recently paid $A40 million for South African-based Take Your Money Everywhere. "TYME" is one of those bridging technologies that gives lower end or under-serviced users access to regulated bank accounts. The protocols and tech derived from this business is likely to add growth for CBA across not only Africa, but also in Asia. Bayer Rosmarin's analysis is clearly concluding that crypto-currencies are likely to stay as niche speculative ventures if banks can link their services in a way to make their day to day use unnecessary.

2. Cognitive Computing

The roots of today's Cognitive Computing can be traced back to the work done by IBM's lab in the mid 90's. That research culminated in the famous series of chess matches between supercomputer Deep Blue and Garry Kasparov.

Fast forward to today and think self-driving cars and algorithmic securities trading. The key to each step in these developments was the ability to handle ever-increasing amounts of data. "Big Data" as readers will know is an ever present theme at these lunches. For institutions such as a big bank, the question becomes one of sourcing and distributing access to that data, and what to charge or pay.

If you're a CBA SME customer, you can access some of that data through their Daily IQ application.

As a further add-on, CBA offers an open interface called Pi. The front-end of Pi is "Albert" and that gives you the opportunity to develop your own ways of interacting with clients.

Interestingly I allowed my mind to stray to some of the many presentations we saw last year which purported to provide just this type of add-on to users. As a friend of mine who runs a restaurant said when I showed him Posse ( "Why should I pay for that? I think my bank already offers the same thing?" What it says to me as an investor is that many of the businesses I look at are predicated on a single business plan. Attract a buyer such as CBA before they put their mind to developing their offering in your chosen sector. I know that sounds obvious. I've lost count of the number of times I've walked out of presentations thinking I've just seen the next unicorn only to change my mind after a cooling off period.

3. Cyber Crime

Readers will know I'm a long time fan of predictive algorithmics. We saw these methods first adopted by the Israelis in order to be able to deploy their limited security forces to the maximum effect. Financial institutions are already using these same techniques to track fraud and security infractions within their businesses. Cybercrime remains a huge challenge. Biometrics is often put forward as a solution, but Bayer Rosmarin doesn't see this as a standalone answer to tech-crime.

If you can find a business with a unique slant on cyber crime, I'd grip on tight. The very fact that there is no current industry standard solution suggests to me that this is an area that investors have a chance to make serious returns. Maybe part "Local Measure", part biometrics is what I'm looking for to fill the gap?


I view Kelly Bayer Rosmarin's presentation as a nice counterpoint to much of what we've been privileged to see and hear over the last year of BBY Disruptive Lunches. Call it the "Empire Strikes Back" if you will. It was at its core a well reasoned and somewhat sobering reminder that big institutions are well able to fill niches that smaller more nimble entrepreneurs are claiming as their own. One question during the Q&A best summed this up. Bayer Rosmarin was asked about the challenge being made to CBA's business by peer to peer lenders. While not dismissing the sector out of hand, she did suggest that operators (e.g. Society One) might find their businesses struggling if interest rates started rising. If you think about it, that makes sense. P2P's model is based on occupying the spread between lenders and borrowers. As rates rise that spread is likely to narrow and with it squeeze P2P business. Ultimately I got the sense that Bayer Rosmarin modus operandi is not to jump at shadows. Like all good engineers, it would seem she prefers to analyze first and act after carefully weighing up the possible responses and solutions.