Tuesday, 19 May 2015

A month of disruptive tech companies . . . Disruptive Lunches, TURF Sports Entrepreneur Night, Maru-D and follow-ups

This edition of the blog has been a long time coming. As an apology I've summarised all the tech orientated events I've been to over the last month.

14 May:

I got an invite to the TURF sports entrepreneur meeting held in Sydney's hipster ground zero Surry Hills.

Disrupt Surfing is likeable but not disruptive to my mind in the purest sense. Essentially they're doing the bespoke design thing on sports equipment. Gary Elphick (CEO) was presenting the business on the night. Their primary product is surfboards though they will offer snowboards and eventually move into equipment categories. It's one of those ideas that will have good appeal to Gen Y / Millenial market where everyone wants to be an individual, even if they all seem to have the same dodgy tattoos and fashion sense (apologies, that's the cranky old man in me coming out).

Disrupt is also part of Telstra Corp's Muru-D accelerator (see below). So I'd already seen the presentation at the demonstration night earlier in the month. I liked the fact that they were very honest about mistakes they'd made in getting their product(s) into production. I'm not sure where this one will go, but I got the feeling that the guys need someone to take them in and shake it up a bit.

The presentation of the Rip Curl Wave watch development process was fantastic for the sports science geek in me. Excellent. We got taken through the development from the start when it was just a waterproof bag of sensors carried down the back of a wetsuit, right through to the social media data sharing website.

At first I though it was just a waterproof Garmin GPS watch, but with the addition of accelerometers it suddenly transformed itself. Think about it this way. A site like Strava cross relies on the cross-checking of GPS with known earth mapping. That is why when you're on abike or a run the meters climbed or ran changes when you get home and upload into your computer. For surfing the problem is that waves are somewhat random, so a standard GPS data dump can't tell you how big or frequent waves were. Add the accelerometer and that changes. The size and frequency of waves can be measured. Now think about the big data aspect and sharing this information correlated with weather conditions and I bet that all sorts of useful information becomes available. The team said they're already observing some unknown surfing spots. The only possible blockage is the secretive culture that surrounds surfers favourite spots. Get them to share as a community and things start to happen.

I don't surf anymore, but would love one of these watches. Surely they can rev it up and make it a triathlon device as well. I'll bet Rip Curl doesn't leverage this. If I were Strava, I'd hire the developers and put them to work. If I were an investor, I'd follow these guys.

12 May:

A two company presentation at a Disruptive Lunch. I went into this without much enthusiasm as prima facie the companies presenting had a bit of a "been there seen that flavour to them". In reality though this was a lot more interesting and once again proves the point that you have to see these companies in the flesh before making a judgment.

More Peer to Peer lending . . . Rate Setter.

Daniel Foggo is the CEO of Rate Setter Australia; he is ex-Barclays Capital. Like many investment bankers, Daniel saw a business he liked and took the leap of faith to establish it in Australia. Rate Setter is the third peer to peer lender we've had present at a Disruptive Lunch, so the audience is familiar with the basic business case.

I would argue that the only differences between the three P2P businesses we've seen is their approach to risk management. Rate Setter is the only one that has introduced a Provision  Fund. The idea is that the borrowers place funds into the fund that can offset default list. Instinctively if you are a lender, that sounds good, but as a banker I don't get it in terms of having a transparent market. Furthermore, I don't understand how it will operate, mainly because we haven't been in a credit environment of escalating defaults. Foggo refers to Rate Setter Europe as his guide statistically but acknowledges that the Australian experience, being devoid of a recent serious recession is skewed away from Europe or the US's experience.

So far, the company only has AUD 3m of loans outstanding. Market leader Society One has just north of 20m according to reports.

I asked a number of questions regarding margin, and while Foggo didn't go into hard numbers he suggested that the margin wasn't a flat line, but rather varied according to credit quality. This suggests yet another level of sophistication in the modelling of the loan book and a nod to the fact that as interest rates have fallen the absolute margin has to have some "curve".

It's still relatively early in the life of the P2P sector to formulate a hard judgement. Readers know I liked the Society One "dashboard" app for lenders. I'll add to this now Foggo's "second level" of risk management implementation. Investors may be best advised to think about a portfolio approach to this sector rather than putting it all on "Red".

Bullet Proof - Cloud Computing (ASX Code: BPF). Great name.

Amongst my generation cloud computing still invokes a certain trepedation. Millenials are less inhibited when it comes to storing data or relying on the "technical hand of god." Either way software and associated data is becoming more cloud-based and for businesses there's certainly value and flexibility in shifting from hard data and application ownership to the cloud.

I'm always skeptical when it comes to companies that are listed on the stock exchange via a backdoor. In the case of Bulletproof, the management used the shell of Spencer Resources. I'll leave that cynicism to one side for the purposes of this blog. The positive side to this is that if you want to look at the hard numbers a quick search of any of the financial specialist websites will get you what you need.

I want to go on record as being a little confused about Bulletproof as a company. Reading back over my notes I thought that the CEO Anthony Woodward was going to hand me the game plan from Louis Gerstner, the brain behind the radical overhaul of IBM that changed it from a hardware company to a fully-fledged consultancy. Maybe that's where bulletproof wants to go, but for the moment Woodward was at pains to emphasise that they're currently 85% a "managed services" group.

So what does Bulletproof do exactly? They provide you with technical assistance for deploying and migrating your environment to the cloud. In short they want all your staff and customers the access, flexibility and speed of interacting through the scalable cloud. Assume you're a company that has lots of variable traffic across your business. Convention says you plan for the peaks because if you fail when business is running hot, you're failing at a time of maximum visibility. To avoid this, you deploy capital inefficiently into racks of servers and capacity that idles for much of its life. With the cloud, you can turn on a tap without the physical restrictions of running a server farm.

Bulletproof doesn't do the hardware side itself. Instead, it relies on Amazon Web Services (http://aws.amazon.com) for this and takes a cost +30% approach to billing. The results are clear for all to see with revenues for FY 14 up 29% to 18.3m and are already running at 11.9m for 1H15. I worry though that the barriers to entry might not be high enough. How hard would be for a dozen middle-level staff (of the current 110) to walk out and replicate what Bulletproof is doing. I don't have an answer to that, but I'd suggest that the management would like to go down the consultancy road, which given revenue growth is not out of the question.

Investors might want to follow Bulletproof as a proxy for business management trends in Australia or better still just as a growth business offering exposure not often found on the boards of the ASX.

 7 May:

Muru- D demonstration night at Telstra Sydney. 4 hours, multiple businesses.

Muru-d is Telstra Corp's accelerator for tech. Start-ups that jump through the various hoops get six-month intensive support, including a workspace. Telstra gives these young companies 40k for 6% of their company in a filtered shotgun-style approach to finding unicorns. It's a great idea for a once monopoly telco to inject some new avenues for revenue into their business.

I got to wander the auditorium and speak to eight of the companies that appealed to me most. I gravitated towards the infrastructure and education offerings and left the social media hipsters to do their own thing. It was an impressive evening. My pick on the night was Freight Exchange led by CEO Cate Hull.


Freight Exchange is one of those ideas that truly could be disruptive. I was telling Cate about the time the hedge fund I was working for in Singapore found out that Komatsu had installed black boxes in their heavy equipment than did more than track GPS. The "brain" could tell Komatsu engineers everything from engine run time to workload. In many ways, it was the first big data I'd seen applied in the real world. I'm not sure Komatsu used it as I would have to bet on economic activity (currencies and bonds), but they could definitely make production line changes to reflect demands in the supply chain.

Hull's idea was to avail fleet owners (at the moment is mostly ground transport orientated) with the ability to source contracts outside of their normal footprint. If 20% of the fleet is idle (or in transit without a load), there's certainly a gap to be filled. The Clever algorithmic analysis we are seeing more of is starting to gain traction in logistics, but there's still a gap. Hull told me at a follow-up meeting that the inefficiencies are especially prevalent in China where the market is highly fractured and in need of a central clearing house function. Normally I try and advise start-ups away from diving into China because of the problems with the intellectual property and cash flows. In Freight Expresses case I'm sure trying the Singapore / Malaysia road transport axis would be successful. Having said that who am I to hold back truly ambitious companies?

6 May:

Investor presentation Moko Social Media (ASX code: MKB)

Moko Social Media on both NASDAQ and the ASX. To be frank, I wonder why they don't axe the ASX listing as it would probably save some money and allow management to skip the flight from the Washington  DC area back to Australia. Just to be clear, yes I know their investor base is dominated by Australians, but as this is the twenty-first century I'm sure they'd cope with a single listing in exchange for saving a nice chunk of change. Enough said.

The revenues of Moko business can be divided into three units. Of the three I thought the most interesting was the REC*IT offering. REC*IT is a facilitator of intramural sports and offers a schedule / social app for college and high school students in the US. Essentially they go to schools and offer the app for free and in exchange get an audience to tap for various streams of revenues.

Moko claim to have access to 900 colleges and through a recent deal into 4,000 high schools. That's significant firepower. They currently have had over 200k app launches, and the users are all in that 18 - 22 group. Though as the high school side gets traction the age average will come down. This part of the business is currently dominated by males, but overall across all of their platforms they skew more to women.

The companion app (for want of a better phrase) to REC*IT is "Speakiesy." This is designed as a kind of antidote to Facebook as it excludes non-students from signing up. They're rolling it out in 120 selected schools this year and aiming for 200k users. This one is not sports orientated, so should have a more immediately better male to female balance.

Other than the school orientated apps they have:
  • Blue Nation Review - a left-leaning politics focused social site
  • Tagroom - which to me looks like a mommy-blogger hybrid (sorry but I couldn't think of a better description)
  • Run Haven - Strava / Garmin Connect with a social side that skews female
Overall they have 5 million actively monthly users comprised of 3.5m for BNR, 1.1m Tagroom, 450k RunHaven and 150k REC*IT. In 2015, they target to double that. Last year revenue declined, but they say this should stabilise and reverse this year on the back of the schools segment.

What do I make of Moko? I like the schools segment for the same reason that the management is investing so much time and energy. I know BNR has their highest "touch", which makes me wonder why they don't launch Red Nation Review and gobble up some conservatives as well. Then again why would I get active on BNR rather than the Huffington Post? RunHaven aside from the strong female skew is in a crowded segment, and yes I'm a Strava bull. Moreover, I haven't had a good look at Tagroom.

The more I look through the Moko presentation, the more I wish they'd just choose one space and focus. This obviously has potential, but I'm not quite there yet.

27 April

A Disruptive Lunch headlined by Black Pearl, an email enhancement app and Aussie commerce, a conglomerate e-business group.

Black Pearl - email how it should have always been

Black Pearl is about email branding. In its simplest form, you have to think about email presented on a professional letterhead with interactive elements. I can't describe it another way.

Pricing starts at US$14.99 per month for first 1-15 users, then US$0.99 per each additional user. You can upload unlimited signature designs, and there is no cap on total users and subgroups. If you're the IT manager you can utilise their Central Management Console and follow, track and trace (analytics) how email is being used. Black Pearl has exactly what I want in any business and I can understand the price.

Nick Lissette is the highly caffeinated CEO, who's already managed to get Black Pearl mail into companies from advertising agencies to banks. The only thing stopping Lissette will be other tech groups adding this feature. I suspect that Black Pearl might get swallowed up sooner rather than later.

Aussie Commerce - Revenge of the bankers

No group at a Disruptive lunch has caused me to procrastinate so much over my blog than Aussie Commerce. If I were to write merely about the 15 e-commerce portals that comprise Aussie Commerce's offering readers would be hitting the "quit" button on their browsers within the opening sentence.

Aussie Commerce is not as much about the business they run as it is about how they acquire them.  There's an adage that says you make most of your money in business when you buy a company, not when you sell it. In other words, if you buy an asset cheaply enough you don't have to worry too much about the rest. That's called value investing and without saying it Adam Schwab and Josh Borenstein were leaving it out there for the audience to connect the dots.

The Aussie Commerce team has built a business with 9.4m members, 3.7m of which are active. Their crown jewel is their Luxury Escape portal that partners with providers to offer vacations to members. Gross turnover per buyer is $344 at the moment, and 84% of buyers are repeat purchasers. Their offerings are desktop-centric at the moment, but they'll have apps by the end of the year.

I wrote in my notes: "these guys are traders". I meant that as a compliment. They say they're not afraid to pay a reasonable price for a business. I'm guessing the management team worked out what they'll pay per user and what synergies they can derive from bringing a business on board. This is far more sophisticated than what I've seen from a couple of Australian based groups recently. They always seem to fall in love with the business rather than the metrics. It surprises me that how few businesses I've seen have been able to value customers in this way. I remember in London, in 2000 at the height of the dotcom/telco bubble attending some of the bankers briefings on Vodafone's acquisition of Mannesmann in Germany. The dominant driver in many of the valuation models was the cost per user. I was always a bit skeptical, but it does make sense. Just consider marketing spend per 100k users versus just buying a customer base.

If you are an investor, who likes trading you could do worse than follow Aussie Commerce. This team at the very least could be a decent guide on valuing a business. Sometimes it's better to be smart than creative.


Many thanks to all those people who invited me to events this month. Apologies again its taken so long to get a post out. I look forward to following-up with as many groups as possible and as always I can be contacted through the IBCyclist Consulting website.


Monday, 20 April 2015

Five things I've been looking at since the last blog

1. Hedge Funds

I've been doing some work on some new hedge funds in the last two weeks. I usually like to concentrate on volatility or "quant" style funds because these seem to be the most under-represented here in Australia. Having said that I was contacted last week by a Japanese long/short fund based in Singapore. Normally I wouldn't have spent much time on them, but a couple of things caught my eye:
  • They have a track record going back to March 2006. This means they've come through the GFC and survived. That's good, and it also gives me enough data to look safely at their correlation to various indices and events. 
  • The returns are good and show positive asymmetry. Their worst month was down just under 6% while their best month was up over 20%. A US investor once said to me: "Mike, I prefer not to invest in people who eat like birds and shit like elephants."
  • The team has been stable. That means no major blow-ups and no significant style drift. I hate it when a fund reinvents itself and doesn't make it clear on their track record.

Elsewhere I'm still trying to help a volatility fund and a start-up fund of ethical investments.

2. Start-ups and Investing in Businesses

Last week I met up with what I'm calling a modified incubator. Essentially they take large equity stakes in businesses or ideas very early in the process. Their main hook is the management wrapper. I'm not sure what to make of it though I'll give them A+ for openness. They invited me to spend some time working out of their office so I could get a feel for the place.

This week I have a BBY Disruptive Lunch and a slightly off-piste function looking at the sporting goods space.

3. Cycling

The battle continues to stay fit. When you're not a 65kg jockey sized cycling god, you're going to be putting a lot of stress on your equipment. Lots of high-end stuff comes with a rider plus bike weight limit. I heard of a chap much larger than me who suffered a carbon wheel brake failure and got busted up quite badly last week. If you and your bike weigh more than 110kgs, you need to check your equipment limits.

My equipment is starting to see signs of needing replacement. I've rebuilt the front wheel of my Fulcrum Racing Zero wheels due to the brake track getting worn down. The original rebuild didn't last long, and I swapped wheel builders to get a different result.

My Mavic Cosmic Carbone SLR's have also seen better days. Followers of the blog know I rebuilt the freehub because of the wear I'd exerted on the main wheel hub over the last three years. The "exalith" brake track is also wearing down and rather than flirt with death I'll be replacing the wheels in the coming weeks with the new Mavic Cosmic Carbone 40's.

If all that wasn't bad enough I suffered my first flat on by Campagnolo Bora tubulars since leaving Switzerland. I rode these quite a bit over the summer when I was rebuilding my green Cannondale and was riding the Pinarello Dogma 60.1.

I knew they were going, and usually I'm good at having new tyres glued on before incurring the wrath of the cycling gods. All I can say is that Vittoria Pitstop "latex goop" and a CO2 cartridge got me home without the indignity of having to ask for a lift. 

4. Rugby

People close to me know that for many years I was a rugby tragic. I lost touch with the sport after returning from the UK and moved to Singapore in 2006. Somehow watching rugby in a tropical environment didn't feel right. Also, a health scare got me into the gym and for many years I avoided any events that required sitting, eating and drinking alcohol for hours at a time. Just lately, I've gone to a couple of Super XV games here in Sydney thanks to some tickets from a friend.

I have this feeling that the game has lost its way though I'm not sure if that's because the local team seem somewhat unlovable, or whether the atmosphere their half full stadium is somewhat lifeless. I used to hate being an Aussie at Twickenham, but the crowd at least had some spirit in them.

5. Europe

Readers know that I've lately been advising a higher weight in Southern European investments. My thesis has been simple. Low growth and budget balancing would see interest rates lower for longer in the region. As the over-hand of real estate looks to sort itself out, I'd expect better returns in the region. The more I look at things, the more it reminds me of Japan post the real estate crash in the early 90's. It took forever for the banks to work themselves out of their property portfolios, and Europe is following a similar trajectory. Investors should never underestimate the value of Chapter 11 bankruptcy in the US. The ability to go through a cleansing process in an orderly fashion is good for investors and debtors. Take for example GE.

Last week GE announced that they were going to exit the last of their finance businesses. Remember this business began when Jack Welch and the team started financing capital equipment leases. First it was aircraft engines and later it was MBS's. I don't blame GE; the returns were sensational, and the regulatory requirement was minimal. The trouble is when you wake up one day, and you're the seventh largest bank in America someone is going to notice. It also helps if the market doesn't collapse. Well, soon they'll be back to being a capital goods company. If you're lucky enough not to be a bank saddled with the title of "too big to fail", it's more than likely that you'll be able to buy a piece of  what GE is selling, apply less equity to it and immediately show an accretion in both your EBIT and your RoE. Happy days are here again.