Thursday, 18 December 2014

Disruptive Lunch Series 2014 ends. Happy holidays to one and all.

Last Thursday was the final BBY Disruptive Lunch for the year. Three entrepreneurs were presenting their ideas to the usual crowd of curious investors. Expert360, ChimpChange and Zeetings represent many of the existing themes we've seen developing over the last year in the tech sector. Just as preliminary disclaimer I should say that the IBCyclist Consultancy is already contactable through Expert360. Therefore unlike others in the room I probably bring certain prejudices to my analysis of the business model presented by co-founder Bridget Louden.

Expert360 is the ultimate trickle-down of the high-end consultancy world. I don't know whether it's Linkedin on steroids or clearing house of professionals wanting to cut out some of the social media aspects of other similar marketplaces. The company's goal is to offer SME's access to the same expert business advice normally reserved for established blue chip corporates. You may want Mckinsey's to sprinkle some of their magic on your business but without writing cheques for multiple millions it's back to the mid-sized accountancy firm  you've always engaged. With Expert360, you get access to individual and smaller firms with specific skills. These skills often were honed at those larger consultancies. Take, for instance, my profile page:


If you hire me or any other consultant through Expert360, you can manage contracts, invoices and payments through the platform. That's why it's a kind of clearing house. That means cutting down on admin. It's a good solution if time is of the essence. Expert360 adds a transaction fee to consultations. The fee will depend on Expert360′s contract with that particular Customer. A consultant such as myself doesn't pay to belong to Expert360.

The big question is: Does Expert360 work? My experience is minimal as I think the model favours refugees from existing consultancies. Certainly if my established client base were more extensive within Australia I could see the advantages more clearly. The portability of my name is important, and Expert360 offers me the chance to be mobile. Bridget and her team are betting on the trend for independence amongst advisors. In a way, they not only disrupt the normal advice lines, but they also disrupt the need for me to spend capital on little used infrastructure. It's an interesting way of enabling fragmentation of the business world.  I know many in the room were utterly convinced of this trend, but how many of those are living the model? I remain somewhat sceptical as I haven't had one referral through Expert360 since I joined. That probably says more about me than Expert360. The idea is good and prima facie the market is deep. My problem since being back in Australia is that SME's and high net worth individuals are very sticky to existing advisors, even if that advice is somewhat outdated.

Expert360 makes sense. Linkedin is unfiltered, but to get on Expert360 you have to apply. How rigorous that vetting is I cannot say. I know HR managers at large listed corporation can implement an algorithm search of Linkedin. SME's don't have that facility. Therefore, Expert360 is an easier to navigate alternative to than the admittedly larger database that is Linkedin.

Expert360 is an interesting opportunity for investors looking to play the post "great recession" employment market. The company is currently in another round of capital raising. I am able to facilitate the introduction of anyone interested to the bankers in question, and will not receive a commission. Readers will know that this blog doesn't post specifics in such cases, but if you feel like a chat, I will be happy to take calls.

I don't like the name ChimpChange, but then again I'm not the GenY demographic that Ash Shilkin and the team is chasing. ChimpChange is a low-cost, instant money transfer facilitator that uses a combination of smartphone app and Mastercard to get around existing banks. It's what I wished existed when robbed in Germany in 1987. One phone call  and within seconds I could have been on my way with cash in my pocket. Here's the video we got shown:


It's not difficult to understand. They have a clearing agreement with a US bank. ChimpChange makes money from the associated MasterCard fees and spread on any FX. The app is currently available to US customers only. They need about 25,000 users to breakeven. The marketing campaign focuses on US college campuses, which I think is smart. The US banking system is still cheque orientated, while GenY college students are tech-focused. The synergy is clear. The problem is how high the barriers to entry are? That's not a question I can answer.

ChimpChange could be a remittance monster. We know that huge swathes of diasporic third world populations currently have very few options to return wealth to their homelands. Given the growth of smartphones, it's logically for the Western Union's of this world to be ripe for competition.

Remittance flows 2012
Consider that Americans send $2 billion a year to Cuba, even though there are significant barriers to commerce between the  two countries. Add to that (say) the Philippines where remittances constituted about 8.6% of the total Philippino GDP in 2012, and you'll understand the global significance of cheap and fast money movement.

Originally I'd intend to invest in ChimpChange the moment I left the BBY offices as the team disclosed to me they were already in capital raising mode. Due to deadlines I was squeezed for time to do my due diligence. I strongly advise investors to forgo investments that might cause them to circumvent their normal procedures. If your DD involves contacting referees and doing company searches, then work to your timetable and be willing occasionally to forgo the odd opportunity. In ChimpChange's case I'm watching it very carefully and strongly advise readers to do the same. It just smells like a potential winner to me.

The presentation by Tony Surtees of Zeetings was more theatrical than I've become used to at these events. Mind you it was theatre with a purpose. Zeetings provides presentations enhancements that allow audiences to participate in various data surveys. That sounds dry, but after you log in and start checking boxes you do get a sense of engagement. The presentation itself was about big data; the Zeetings piece was just an add-on to demonstrate a new tool.

Zeetings in a way was a good full stop to the series for 2014. If any one theme resonated loudest, it was a progression of data mining amongst even the most passive tech offerings. First came the Monte Carlo simulation in an effort to win games of chance. The casino by nature of the repetitive execution of an action within tight parameters was easy to data mine. Man counted cards and loaded the dice long before they crossed to the New World. When Alan Turing produced the first electronic computer the ability to crunch numbers began an arms race that passed through the military, aerospace and on to finance.


When I sat at SBC Warburg in London in 1998 and met two Ph.D. astrophysicists tasked with building the first algorithmic trading model I had ever seen, things started to change. From the very moment, they described to me how they used predictive models to define atomic particles it was addictive. Next came Google with their uncanny (for the time) ability to target search results. It goes on and on, until today when two entrepreneurs with a spreadsheet and the money to buy a data series can predict by shopping habits if a woman is pregnant.

The ultimate question for an investor is can the entrepreneur make data actionable in some way? Secondly how high can they build patent walls to protect their discovery? Finally, what role do governments, and for that matter people play in the success or failure of these ventures? 2015 will surely bring more challenges.

Many thanks to all the companies I was privileged to see this year. Thanks also to the BBY corporate finance team for inviting me to these presentations.

Happy Holidays. Merry Christmas.

Ciao!

Tuesday, 9 December 2014

What is Fishburner's? Are 500 Startups better than 5?

Lately, I've taken the view with tech companies and for that matter startups in general that you need to see a lot of them. That means when I get an invite to an invent I rarely say no. Last Thursday I have to admit that I went along to Sydney incubator "Fishburners" with little more than the title of the event to describe what was on offer. Having said that I was glad I did.

Fishburners describes itself as the "largest tech co-working space in Australia." There's over 100 startups paying up to $300 a month, less if they're hot desking, for space within the facility. For that, you're encouraged to share ideas and connections with other entities. Fishburners is a not for profit, but that doesn't mean there isn't a benefit to having so many potential sources of innovation under one roof. If just a handful prove successful then they will have fulfilled their mission of fostering Australian based tech talent.

Thursday's event was a special offering for investors interested, but not yet fully embedded in the world of angel investing and venture capital funds.

Dave McClure is a founding partner of "500 Startups" a silicon valley based tech accelerator that offers to:

 "... invest $100k in exchange for 7%, and charge a $25K program fee for a net $75K investment."

They have four funds. The first is the flagship fund; the second is a follow-on fund. The other two have a geographical bias (LatAm and SE Asia). McClure wasn't presenting the funds per se; rather he was there to talk about how 500 Startups approaches building a portfolio of possible winners. Eerily for me at least there was no secret sauce, no magic formula for picking winners, nor any new trend to follow. His presentation reminded me of one of those lectures on portfolio construction. It was blunt and to the point. If Dave had been talking to potential retirees his laid back, up-front style would have been a winner; with a room full of investors of various experience levels it was a good wake up call. Quite simply when you're dealing with companies in their infancy volume of investing becomes a valid approach. If 80% of startups don't make it, then how can an old hedge fund manager like me bring the mentality of 3 - 5 core portfolio ideas to investing at this level?

According to 500 Startups you have to approach the opportunity as being extremely asymmetric. To give you an idea of how this differs from a hedge fund investor approach, you immediately draw a red line through investments that present as asymmetric. If you see a fund that has losing months much bigger than their best winning months, you walk away. As one investor said to me in 2006:

"If it shits like an elephant and eats like a bird, you're in trouble."

That guy is just not going to cope with a fund that has 80% of it's picks go under, another 5 - 15% barely pay you back and a few success stories in the end. Maybe if you bag the proverbial "unicorn" the asymmetry might be acceptable, as in:

"I invested in Google when Larry and Sergei were still at Stanford, and I doubled up at every subsequent offering."

I hate hearing from "Google-guy" at events. I do get it that if you make a billion dollars you can afford to leak out 50 million or so in tiny 100k bets in an effort to add to your unicorn stable. And that essentially is the proposition.

500 Startups is in the business of buying cheap options. Build a portfolio of tiny $25k bets across a multitude of plausible businesses and ideas, and then look for that inflection point where they're getting traction. Typically this is when you start to see validation through revenue or audience. At that stage, your 25k has bought you the right to make a decision as whether to double (triple, quadruple, etc.) up.

When Dave McClure says that these options used to be cheap, I believe him. In fact he says they are still. It reminds me of trading equity options in the early nineties. Before the '87 crash options, especially put options were insanely cheap. Afterward, options in general became extremely expensive as investors started to calibrate second level inputs into their models (skew and kurtosis as examples). You have to add to this the propensity of cyclical crashes. It's easier to understand the attractiveness of making a large number of high leverage, small cost events in the hope of another '87, '00 (dot com), '08 (housing) type event. In '93, my boss wanted me betting against this as the cost was far greater than the opportunity. We wanted to be like a casino that knows that occasionally someone on the roulette table gets lucky. 500 Startups sees it more like pre- '87. Things are still cheap, and the portfolio of long ideas properly structured looks likely to show an outperformance. Take the roulette example. Right now portfolio investing in startups is like playing roulette, except that occasionally instead of paying out 35-1 on a 37-1 event, you get a jackpot that pays out several million to one for the 37-1 event. That's why these options are still cheap.

And just to prove the point about option pricing, here's a Monte Carlo from Patterns of Successful Angel Investing by Simeon Simeonov
It's interesting to an equity guy like me that the optionality in the startup world didn't get more expensive. If crashes lead to liquidity events, that in turn make options more expensive because the risk reward ratio has changed, why hasn't this happened in the case of the tech world? Part of the answer according to McClure is the downward spiral in business costs associated with tech startups. In 1999 $25k wouldn't have got you much computer power. Now $25k gets multiple computers, some office space, and some server capacity, for a good chunk of that crucial first year. The founders biggest cost is time and sunk costs before being in a position to market the idea to an accelerator or angel. The leverage available has increased to compensate for the failure rate. Meaning the portfolio theory is still valid.

I hope none of the above sounds too disingenuous because it's not as simple as throwing darts at a list. Say, 500 Startups hears from 1,000 businesses each year and interviews 10%. Then they offer a small fraction of these some cash. That task is enormous in itself. And think about it this way; if you believe that the opportunity is in the portfolio and not trying to find unicorns then this is what you have to do. That's why as an investor you may be better off putting your cash into a fund rather than trying to build your own portfolio of options. I haven't looked at the returns from 500 Startup's various funds because that wasn't the idea of the presentation. Don't get me wrong, I wanted to ask Dave about his Sharpe Ratio, but somehow that seemed a bit rude given that he'd just sold me a very cheap option on investing in his world. Fishburners kindly brokered that transaction.

Thanks to Dave McClure of 500 Startups and Murray Hurps of Fishburners for allowing me to attend the event. Please don't hesitate to contact me directly through my website http://www.ibcyclist.com if you'd like to hear more about what I thought of this and other events I've written about in the blog.

Ciao!

Monday, 1 December 2014

Another @BBYltd Disruptive Lunch . . . Smart engineering. #Maestrano, #Palantir, and #PowerbyProxi

Maestrano, Palantir, and Proxi are all examples of smart engineering companies. Only Proxi makes hardware; Maestrano and Palantir are software companies. Each company is disruptive of an existing platform, and each had a good story to tell last Thursday at BBY's offices in Sydney.

A partner at one of the largest investment firms in the world once said to me:

"Mike, your business structure is too smart. You've outsourced everything. I know these guys and this firm. We even recommend this firm to some of our investment managers. No one has ever come into this office and presented me a structure like this one. It's all too clever. If you want us to invest, you've got to bring some of this in-house."

We never moved the staff in-house because the cost in Switzerland would have killed us on day one. I'm not sure what that investor would have thought if Maestrano had existed in Geneva in 2010.  Maestrano is for want of a better phrase a networking platform for outsourcing software. Stephane Ibos is the CEO, and a Frenchman, who swapped the northern winters for southern sun and settled in Australia after working for defense giant Thales. He was "grandes écoles" to the core. That's a good thing in case you're wondering. Ibos' Maestrano presentation had all the hallmarks of a sound engineering background.

The Maestrano offering targets SME's. You subscribe to gain access to your personal platform that integrates various software providers on one coherent dashboard. One platform is controlling everything from CRM to Ops. From this dashboard Maestrano claim that you'll be able to forget about the old days of outputting excel data files from (say) your client management system and then trying to upload it into your accounts system. No more upload errors from mismatched field names, in fact, no more "CSV" files clogging up your hard drive.

As is my usual practice, and as I class myself as an SME, I took the time to sign-up for a free trial of Maestrano. The first thing I did was take a look at what apps I could "purchase". Thirty-six apps currently are available to users. As an example, I went straight to the accounting section, as currently I, like many SME owners run my business on a spreadsheet.


There are six apps in accounting to choose from, so I selected "QuickBooks" and checked out the basics.

You get a nice introductory page with some screenshots and a summary. Once you select the app it will appear on your dashboard.


In order to get things started you use the data upload wizard. Although the wizard is somewhat manual compared to what you'll be doing once you're up and running, it's straight forward in terms of process. Just hand over the "keys", or in my case the excel and you'll be populating apps before you know it. The only problem I see is the personal embarrassment of showing people how unorganized you currently are.

So what's it cost and how do they make money? You buy a license for a specified number of users. In my case, that would be 1-5 simultaneous users. You then select your apps and pay USD 29 per month, per app. Plans cover 6 - 10 ($89.70) and 11 - 20 (179.40) users. After that, you just call them up and ask for a deal. It's simple, and efficient. No more managing individual pieces of software, it's all on your dash and you get one convenient invoice.

I liked Maestrano and see it as an easy "go-to" for start-ups keen to keep costs down and stay on top of their business. Their revenue is roughly 50 / 50 Australia / USA. There's a new JV project in the Dubai that will cut into that geographical revenue split by adding $17m into the business. Right now there's 2,200 businesses signed up, and CEO Ibos said they were looking to float the company in the second half of next year.

Palantir is hard to talk about, not because of their presentation, but rather because this is about metadata engineering on the edge of everything the public knows.  One of Palantir's first investors was In-Q-Tel, a venture capital firm that invests in high-tech companies for the Central Intelligence Agency. That probably explains why I felt the presentation was somewhat obtuse.



The core clientele for Palantir is unsurprisingly governments. They also count major industrials as contributors to their revenue line. They don't have a sales force, just 1500 staff, mostly engineers. It felt like you don't choose to do business with Palantir; rather they choose you. To quote the presenter: "We don't want to deal in the mundane." It's a unique approach to business and had most in the room smiling enviously.

The Palantir business is about risk management and mitigation. They build systems that help entities defend against cyber threats, fraud, and internal threats. This means if you're able to engage Palantir they can help you understand everything from customer churn, client lifetime value, retention analysis and even provide predictive metrics across a whole range of fields.

Their main competitor is Autonomy. Palantir would characterize themselves as more a bespoke consultant, rather than off the shelf software house. Palantir staff get embedded in the client's problems.  But what does Palantir offer? My understanding is that they trade in unstructured data and give it form via various types of algorithmic analysis. I didn't get that from the presentation. I had to do some data mining. Palantir product is employed by counter-terrorism analysts at the U.S. Department of Defense and fraud investigators at the Recovery Accountability and Transparency Board. Cyber analysts at the U.S. Information Warfare Monitor (responsible for the GhostNet and the Shadow Network investigation) also employ them. In fact, watch "Zero Dark Thirty" and you'll get the picture. If you're a bank looking for certain characteristics amongst your staff that might see them skirting compliance or racking up a series of "false" trades, then Palantir can help.

One interesting aspect was the emphasis on dealing with potential rights violations from their activities. The presenter was at pains to make it clear that Palantir seeks to engineer protections within its software. These protections mean if you're not authorized to see a particular stream of data and (I assume) the statistical analysis associated with it, then you can't see it. I don't know about the other members of the audience but after Wikileaks and Snowdon I am somewhat skeptical of this claims.

As an investor, it's very unlikely you'll ever be invited to become a shareholder, unless the company lists on a stock exchange somewhere. The best thing you can say as an investor about Palantir is that it shines a ray of light on what is possible in metadata. If Palantir is uninterested in the mundane, then there are probably companies out there happy to deal in the dull in exchange for good returns. Investors should be looking companies who not only collate big data, but are expert in its analysis.

I didn't envy Proxi CEO Greg Cross when he stepped up to the lectern. If Meastrano was logical and Palantir was fascinating, then Proxi was easy to understand.


Proxi engineers wireless power solutions. You've probably seen examples of charging pads that you just place your smart phone on to charge. These are "resonant induction chargers". The chips that control the process are the result of 20 years of hard work by Professor John Boys and his engineering department at Auckland University. They have produced 252 patents and applications for patents. The University remains a core shareholder, and the company comprises 70+ employees. They've already raised $25m and licensed their technology to some big players such as Texas Instruments and Samsung.

The market for this type of charger is likely to grow to $15bn by 2020. CEO Cross says this is conservative. I thought the most interesting statement Cross made was the industry is all about standards. I'm not sure many people in the room understood exactly how important this was. This was acknowledgment that better products don't always win.  Sony's Betamax failed to build a business case for a technology that was better in nearly every way than its main competitor VHS. If Proxi wants to get value for its patents, it needs them integrated into accepted engineering standards. That is why Proxi still has some execution risks, and why they need to spend so much of their time courting chip companies as partners.

I suspect Proxi would like to be a standalone entity, preferably with a public listing. Cashflow should start to be less of an issue with some new chips coming on line in the next 18 months. It's an interesting business, much in the way that several smart hardware companies have been at these lunches in the last nine months or so.

Finally, investors who follow the blog might want to look back at my notes on Sydney smart power meter company Wattcost as they won the first-ever SingTel Group-Samsung Regional Mobile App Challenge last week.

Back on June 10, 2014 . . . remember this one?

The contest attracted more than 500 submissions from across the region. I picked it as a "no-brainer" earlier in the year and suspect that after a recent street meeting with co-founder David Soutar that things are progressing nicely. Have this one on your favorite news ticker and be ready with a cheque if given the opportunity to invest.

President and Head of Samsung Media Solution Center, Dr Won-Pyo Hong;  Minister of Communications and Information, Dr Yaacob Ibrahim; SingTel Group CEO, Ms Chua Sock Koong and Optus CEO, Mr Allen Lew present prizes to the winning team, Wattcost. 
As always contact me for further information or introductions to the companies mentioned here via my website www.ibcyclist.com.

Ciao!

Tuesday, 11 November 2014

Updates and follow-ups . . . . #Disruptive / #Cycling / #Investor

As promised, I finally managed to catch-up with a few of the companies I've recently seen presenting at BBY's Disruptive lunches. My promise to readers, companies and investors is to try and follow-up before making definitive judgements. Shooting from the hip always gets me in trouble, I've lost count the number of times I wished I slowed down and took a deep breath before gunning-up the revs on the IBCyclist analytical engine.

1. Mainline Power

M.D. Jonathan Clark kindly hosted me for coffee and a Q&A session at Mainline's office in Sydney. My practice is to save metrics for clients of IB Cyclist Consultancy, but having said that the following broad points apply:

Production logistics look likely to be a focus in the months ahead. Current lead times for the type of bulky orders that Mainline wins are challenging for them. The company is committed to reducing this time in the short term by about a third and Jonathan Clark seems optimistic on this coming down further over time.

Mainline reminds me of the Japanese and Korean engineering and heavy industry companies I used to look at in my role as a hedge fund portfolio manager. As a public company with a long track record, you're able to set terms for order flow that suit your balance sheet and financing facilities. Mainline as a relatively young company is closer to a sub-contractor that is required to be a "just-in-time" supplier. Typically if you're at that end of the supply chain you want to be able to weather time management changes further up the chain. Therefore, while having a relatively clean balance sheet they lack sufficient buffer to take advantage of opportunities that require extra business dexterity. This is not an unsurmountable problem, but something that needs attention and commitment on by the board.

I should also mention that the meeting gave me a chance to get a close-up look at the power track and the associated plug options. It was pleasantly surprising how well engineered the fitting between the plug and track was, almost reminiscent of that satisfying "door clunk" you get on better-engineered luxury cars. On an aesthetic note, the basic black or white track is fairly industrial in feel and appearance. The company has been trialling some of the 3-M adhesive wraps that we're seeing used to give car interiors and exteriors finishes that mimic anything from carbon fibre to wood grain. If this comes through I can see the architecture community being more supportive of the product.

Finally, a quick word on product cost. The power track is clearly more expensive than fixed power points. The like-for-like comparisons fail to take into account the flexibility that I wrote about in my previous blog. This flexibility is the key to the product. Strategically placed tracks should help fit-out companies and landlords alike in cutting down costs associated with tennant turnover.

I remain positive on Mainline's product offering and am available to discuss the various metrics I was able to glean with IBCyclist clients.

2. Lime Rocket

The feedback I got regarding my blog comments on Lime Rocket's crowd based games model were mostly concerned with how I'd failed to grasp the engagement aspect of the core app. Last night I went to the Toxteth Hotel in Glebe to check it out for myself. The Toxteth is a fairly typical inner-ring pub in a young-skewing area close to Sydney University. It's a neighbourhood that should be fertile ground for Gen X & Y types looking for good food and an entertaining night out.

BuzzyTV is the app you'll need to participate. The idea is that the various venue screens project the games onto them, presenting various possibilities. Choose the right answer quickly, and you get max points. Take too long and instead of 12 points (that was max for the games I was playing) you might only get two points. The points accumulate, and the venue owner has a feed of everything that's going on, and therefore can award prizes, etc., for the best players. Last night I counted three games on a loop, not ideal, but it's still early in development. I didn't see any rankings appear on the screens, so you didn't know how you were doing relatively to other players. Was it a glitch? Maybe, but it needs highlighting, as I gave up a bit when I missed a couple of answers due to technical problems.

On the technical side; the version I downloaded from the Apple App store is apparently older than that you can get on Android right now. The CEO Mark Gardiner leant my wife his own Samsung Galaxy 4 to try a new app, and it had a much sleeker, and dare I say more adult interface. The Toxteth didn't offer a WiFi link, so I was at the mercy of telco provider Optus. Mike's phone was on Telstra, and he got a 4G signal that allowed for quicker and faster syncing with the action on the TV screen. Optus had me on a 3G and kept dropping out. That is and isn't Lime Rocket's problem. As I said to Mike, the short attention spans of the crowd he's trying to capture doesn't give them much wiggle room for technical glitches. Ideally WiFi is the solution, and venues who want to make the most out of this need to fit it out as soon as BuzzyTV is available. If you're not convinced perhaps they could restrict the use of the WiFi link to BuzzyTV users by asking Lime Rocket to generate a password at venues that users can use when playing the game?

The app update for Apple should be available soon. I understand the team's frustrations with the Apple ecosystem, but they are not alone in complaining about the pipeline problems with the Cupertino mothership in respect of apps.

I remain sceptical of all the parts working in the short term. Mike told me of some of the new games and functions they are experimenting with, so let's just call what I saw version 1.0. I'm happy to waive my usual fees in exchange for a glass of wine and light snack for any client wanting a competitor for the evening at the Toxteth. BuzzyTV is available Monday and Tuesday nights.

3. InStitchu

Of all the companies and products I've looked at in the last 12 months, I get more questions about my InStitchu suit than anything else. My guess is the low (sub-$500) price point, promise of personal tailoring, and quick delivery time (4 weeks), has many readers wanting to try out the product.

I chose a fairly plain navy blue InStitchu suit, single breasted, two buttons with double vent. In addition, I opted for notched lapels, working cuff buttons and flat fronted trousers. The cloth is supposed to be Zegna, and to be fair seems to be of a high quality. I've worn the suit a half a dozen times in the last two months. From business meetings (I had it on during my visit to Mainline), to upmarket artists exhibitions I've had a few compliments. I don't advertise the fact that it's an InStitchu, so maybe I'm a clothes snob?

Noticeably the fit of the suit is what I'd call "Italian". Meaning it's fairly slim in the limbs as well as having a slightly pinched jacket torso. My first impressions two months ago was that the sizing was close to what I was used to at my regular tailor, and that remains the case after recent use. I know of another wearer who was a little disappointed with the fit. I'm not sure he'd bought many tailored suits, so probably wasn't as demanding as I've become when it comes to measurements. Of course, the whole idea of the InStitchu business model was to transition from standard fitting sessions towards body scanning. As readers know, the body scanner link to InStitchu didn't work properly in my case. As I've decided I like the product, I'm thinking of venturing back to the scanner booth and trying again. After all If you're looking at investing in this business because it's a disruptor, then you want to be confident what the team says works, does work.

So, the bottom-line grade on the InStitchu experience is a solid B. If the body scanner link can be shown to work I'd mark that up to an A-. If you're wondering what it would take for me to give an A+, think 3 week production time, product tracking and an option to go super premium on materials to some cashmere blends (with associated cost implications).

4. Other meetings of interest this week

On Friday, I'm seeing Alex Martell, a former fellow investment banker who's come up with an interesting app for we wine "tragics". This is yet another version of the crowdsourcing tilt we've seen of late. In the case of "Vinus", you photograph the label of a wine, and it identifies it and hooks you into others who may have had the same bottle. You then get to see people's opinions and ratings. It doesn't currently hook into a pro-database like some similar apps as it wants to make use of the wisdom of the crowd theory. I like the idea, but as a former wine snob, I am still somewhat reluctant to take the advice of a man or woman in the street view of my favourite beverage. To me, crowdsourcing the subjective is always a bit fraught with danger due the vagaries of fashion. Look, for example, at the "ABC" drinkers (Anything but Chardonnay). Offer half of them a good village cru Puligny-Montrachet and they'd find it hard to guess it's a 100% chardonnay. The same goes for Chablis with it's flinty minerals being a long way removed from the over-oaked $12 offerings that a lot of drinkers may be familiar.

I'll report back after I see Alex, and hear what he wants to accomplish with the app. Prima facie I'm positive on most of these shoot, identify and action apps.

--------------------------------------------

A reader sent me a mail recently asking me about my cycling. I've been so pre-occupied getting the consultancy up and running that I've spared blog followers the trials and tribulations of my recent cycling adventures. I can report though that eight days ago I, along with 9,999 other Sydney cyclists did the annual ride to Wollongong, some 90km's south of where I am now. It's a great day out, and even with a 30km headwind most people seem to have survived the ordeal well.


I rode the Cannondale Evo, though I was sorely tempted to add on the Campagnolo Bora's. The guys at Cheeky Monkey dared me to tempt the puncture gods and ride the tubulars, but I wimped out.

While on the subject of my favourite bike shop, it won't be long until my green repaired Evo goes off to Mark for the mechanical rebuild. Apologies to all those I've bored to death with tales from the dark side of eBay as I've attempted to equip my reborn steed with the finest Italian components at the lowest possible price. The last of said components is now on its way from Starbike in Germany. Overall I've estimated a 40% saving versus the equivalent regularly available components. Some of that, of course, is because I've been buying Campagnolo, which is not well supported by retail in Australia. There is, of course, the fact I'm rebuilding at the end of the European peak season, so many components are on sale as shops look towards the 2015 spec equivalents. Most of the time there's only minor changes. In my case, the hunt for Campagnolo's Super Record group components has been helped by an unusually high number, but aesthetically minor changes leading to heavy discounting of 2014 stock. I intend to have this done before Christmas, and would like to publish a blog and associated photos of the build.

Finally, as a treat, I thought those of you looking for a challenge next summer in Europe might be interested in the footage of a particularly interesting ride.


This is Mike Cotty, probably my favourite endurance rider at the moment. He's a long time Cannondale fan and now Mavic sponsored super-rider. That's 1,000km's non-stop over some of the most famous climbs in Europe. Before I saw this I wanted to ride the Stelvio, now I'm not sure. Dust off those air miles and feel free to contact me if you'd like to try some of that terrain. I can't promise to join you, but I'm happy to connect you to some good bike mechanics and excellent stopping points.

Ciao!

Monday, 3 November 2014

Disruptive Lunch: Mainline Power, Lime Rocket and Farmbot. Some sexy and some practical.

Too often when we think of disruptive business models our collective minds conjure up visions of computer screens, smart phones, personal sensors and scrolling lines of computer code. The Disruptive Lunch at BBY last Thursday reminded this blogger that although the use of software is at the forefront of many developments, there's still a place for some cleverly engineered hardware. Three businesses presented their disruptive models, and of the three Mainline Power was the most accessible, Farmbot the most Australian and, Lime Rocket the most Gen Y / Millennial.

Mainline Power offered a view of their power track system. The power track offers a flexible alternative to traditional power points, as it allows users to tap into fixed power at any point along the track. Additionally, the "plug" can be placed at a myriad of angles allowing the user to avoid the anguish of awkward plug/transformer situations where you're unable to use a socket because of restricted space. We were also shown their data module that uses power track to access conventional electric systems for the transfer of data.

video

Jonathan Clark, the Mainline Managing Director, gave a comprehensive and honest assessment of the product and business. I always enjoy it when management is honest regarding missteps they've taken. In the case of Mainline the business, according to Clark was somewhat unfocused in targeting its ideal consumer of the product. The problem with the power track system is that you could apply it anywhere a traditional power point is located. In reality, it's more an industrial, semi-industrial product because the main selling point is its scalability. Therefore, the Mainline team has refocused on the educational niche winning business in universities and schools where staff and students require facilities to recharge the now ubiquitous laptops and tablets they take from location to location. The above video shows the system. As much as I'd like to have this in my kitchen or ideal room, I prefer to think about the possibilities in situations where crowds gather.

In terms of the actual revenue numbers and details regarding current cashflow, Clark didn't elaborate, which probably is the fault of those of us not asking him about it during the question period. There were some examples of mandates, including a middle eastern high school. That school is the first of 35, with the inference being that if you get the first one right the likelihood is that further mandates will follow. The only competitor Clark mentioned was Singapore based and was a higher cost and complexity supplier. Mainline was quite open in saying they are looking for investors, preferably those with some insight into the building sector in general. I'll be following up with Jonathan Clark this week with a view to getting further information about installation cost comparisons, current order book and the size and type of financing they are seeking. Mainline Power might lack the sex appeal of some of the offerings we've seen recently, but investors shouldn't ignore the amount of infrastructure investment currently taking place across the globe.

Farmbot just felt very Australian to me. The emphasis on rural water supply management in the continent of such vast distances and limited rainfall seemed like something that should have come about a while ago. Having said that I know at least one blog reader in the agri-engineering sector who'll know doubt send me a mail with several examples of midwestern US companies doing a similar thing. Given that Farmbot says they have a number of very specific patents on various pieces of the technology involved in their offering I'll just deal with what was presented.



The Farmbot system uses fixed receiver stations that can pick up signals from sensors anywhere within 35kms. That's a lot of square kilometres and a good start for a system that costs about $150 per sensor and a subscription of $416 per year. I'm not sure whether that price of $416 is per user or per receiver station, but in any case it is cheap given the requirements of running a rural property in Australia. I didn't catch the receiver station installation costs, but I sensed that the business being reasonably new was still finding its feet regarding pricing. Apparently stations are up and running in the Hunter Valley area of New South Wales. I also didn't catch the number of sensors you could have per station. Right now Farmbot is concentrating on water management, but other sensors such as soil moisture and gate status are imminent. In the future, the list of sensor types is only limited by your imagination, but Farmbot lists:
  • intrusion alert sensors
  • traffic sensors (including number plate recognition)
  • river level sensors (flood resistant)
  • weather station (simple and advanced)
  • electric fence monitoring with fence power level / health measurement
  • electric power usage
  • general machine sensing
  • fuel tank levels
  • custom sensor platform for user specified or supplied sensors
I'd like to see some automation sensors added that activate systems, such as heating, cooling, etc. These would permit greater distance management possibilities for small farm owners.

So what else do get with your Farmbot subscription? The data is cloud based. Anytime a sensor triggers a warning the property manager gets an SMS with details. That message will provide a link to the owners account via a browser that provides the current status and historical data regarding the water source being measured by the sensor in question. All this should according to the company save $1800 per year for a property based on four water inspections per week, 30 minutes of travel and a 4 km round trip per inspection. It should cover its set-up costs by the end of the first year, making this a great system for industrial scale projects and management intensive semi-hobby properties. Personally I see this as an interesting solution for small communities of properties that lack scale normally to run commercially viable operations. Surely a single caretaker, manager could cover several small farms simply and quicker than what is now possible? Farmbot seems to be in Version 1.x right now, meaning investors might want to take a closer look at this one sooner, rather than later.

I'm going to try and see Lime Rocket's offering of venue based games this week in Sydney. As an early Gen X investor (over 40 years old) I need to see and preferably "touch" some of these social media type offerings. As the long time readers know, I usually join (Posse), subscribe or buy something (InStitchu suit) from companies that I see at this type of corporate event. I take the view that if you're going to give an opinion or provide an investment case to someone that you need to have some experience of the offerings.


Lime Rocket is difficult for me as it's predicated on the idea that venue crowds are more smart-device focused. This means you need to grab the attention of individuals if you're going to maximise their revenue per head in your venue. Simply put you want people to stay longer and spend more if you own or manage one of Australia's 60,000 pubs or clubs. I can understand that impulse, but electronic trivia games with prizes? I don't understand much of what Gen Y does, but are they going to embrace a night out spent hunched over a smartphone trying to remember the names of the Mutant Ninja Turtles?  Perhaps that's unfair, and exactly the reason I'm donning the jeans and Pink Floyd T-shirt and heading to Glebe in Sydney this week to check-out what Lime Rocket is doing?

I don't think it's any coincidence that Lime Rocket CEO, Mike Gardiner is ex-Tabcorp Australia. Tabcorp provides various gambling platforms for users in Australia. As someone who's spent time looking at the pub sector in Australia during the early part of the century, I was very concerned about the reliance these venues had on video poker machines to drive revenue. That gaming machine model fell apart when regulators and governments put a limit on the exponential growth rates we had seen in poker machine numbers. Lime Rocket looks to me to be taking up the gap between poker machine acceptability and the need for something that engages venue "goers". This, of course, is not a bad thing if you believe that it works and unlike many of the listeners at BBY on Thursday I wasn't as enthusiastic about this as some. Gardnier's team also hopes to provide their offerings to arena type venues on the "jumbo-trons" that we're seeing more often. I'm still of the view that at arena venues crowds gravitate to apps that allow them to pre-order food, upgrade seating or win prizes without the game add-ons. This blogger is not going to pretend that Lime Rocket is going to succeed or fail on the strength of one presentation. I am pledging to be at the Toxteth Hotel this week to see why I should be more positive. If you're a reader with a thirst for trivia or just a good beer, then contact me, and I'll happily compete to see who's got the juice when it comes to Lime Rocket.

Ciao!

Wednesday, 22 October 2014

Google's Alan Noble is happy. Another BBY Disruptive Lunch.

Maybe I'm wrong, maybe Alan Noble, Google's Chief Engineer in Australia is more than just happy, maybe he'd describe himself as feeling awesome, or fantastic, or something equally as hyperbolic? To me confidence and happiness have a very positive correlation, and usually if a person is happy they have a clear idea or confidence in what they're doing. Alan Noble exudes positiveness in spades, enough to have those attending BBY's Disruptive Lunch last Thursday leaning forward in their seats, intent on hearing the latest from the heart of the starship Google.

In many ways, it was a deceptively simple conversation. Noble gave us four or five themes, depending  on how you grouped some of the subtler sub-themes.

Cloud Computing allows the flexibility and mobility to escape being shackled to a device or environment. The old paradigm of licensing installed software to a single computer is changing fast. The ability to deliver applications across multiple devices cheaply is well established, but yet to take hold completely. Noble used the example of Adobe Illustrator, an expensive and unwieldy graphics package that may suit high-end users, but is difficult and restrictive to the retail level enthusiast. The disruptive counter is Canva (https://www.canva.com), which allows you the flexibility of accessing the programme from any of your devices and pay for what you use.

Omnipresent Computing (my terminology) is the v2.0 of the cloud where devices are continually assembling and formulating situational solutions. If the cloud was about connectivity, then omnipresent computing is about making better use of your cloud based data. Take, for instance, the current trend in wearables. I record all my exercise activity by wearing a number of sensors (heart rate monitor, cadence pod, etc.) and then export the data to a 3rd party to assemble in a usable form. The new wave seeks to collate the data and push through advice or actions. The algorithms will start to learn, rather than just be a set of field based conditional actions.

An example of this is what if the device you used to book a taxi started to learn when you're most likely to want to call for one. Maybe it's a result of knowing not only the weather or time of day, but also your physical state? The device might then proactively "push" a solution. Google's self-driving car is another example. Imagine a car that not only learns to drive the speed limit, but also knows your driving characteristics, such as when you prefer to slow-down or speed-up. Might it also predict routes and climatic control settings?

The interesting thing about Google is that they don't expect all the devices, software and platforms to succeed. Some of them are just about testing the limits of the theme. The car is a great example because of the staggering number of possibilities. Noble mentioned that Google Maps came from the Australian engineers, and he seemed to suggest that there was no particular outcome envisaged when they started the project. The result, of course, was an open API that let others capitalise on the data to produce various outcomes. I had a chance meeting with a Sydney based firm that was leveraging Google Maps to produce interactive solutions for university campuses. That firm had just won a mandate in California. If their solution starts to go from learning your timetable to know how you interact with your environment the possibilities for efficiencies and of course revenue start to add-up.

Software. . . For blog readers, you'll know that one of the most consistent themes of these lunches was the advantage of software solutions over hardware. Alan Noble and Google are about software. He called the software "the beast let lose". We've known for a while now that if you're a business the quickest way to low margins and extinction is to tie yourself to hardware. Apple might sell a lot of devices, but it also sells a lot of software through its app store. A smartphone without apps is not a smartphone, and a smartphone that is not merging the data in the cloud will get left behind.

At a previous lunch, we got to see Ollo Wearables and their solutions to aged care via mobile monitoring and voice control. The team there are focusing on software, not hardware. The data is the king, and the way you can leverage the data through the software will drive hardware manufacture.

This all leads to Big Data. If the software is the solution, then its only as good as the data it gets. This is where it helps to be open in your use of applications. Noble characterised it as the individual trading data for higher levels of service. The smart use of data leads us to the algorithmic targeting of ourselves.

If those were the big trends, then the delivery of all this seems to have coalesced around the philosophy of building the product first and getting the revenue later. The comparatively low cost in plant and equipment is allowing for wider experimentation with solutions to various problems. You get the sense that even if Google's biggest cost is the engineers they need to implement their various philosophies, they're still a comparatively cheap commodity given the outcomes they've already achieved. Google in Sydney has 500 engineers. If you said that to the man on the street in Sydney I bet they'd be surprised, but shouldn't be. Consider instead that if all this scalability is coming down the pipeline that perhaps we are understocked in engineers and overstocked with lawyers, bankers and maybe even teachers and doctors?

Finally, a note on Google as a business. Alan Noble raised a few eyebrows in a room of bankers when he said that Google wanted to remove the stigma of failure from their team. I even heard a few nervous stifled laughs when he said this. I can imagine as an engineer at Google going to Noble and saying: "well it didn't work, but we got some interesting data." I bet those nervous laughs were thinking: "are you kidding. That's a great way to get cut." Google calls their skunkworks "Moonshot X". There's a reason for that. You set a goal that seems as impossible as Kennedy's statement in 1960 that the US was going to put a man on the moon, and you see how far you get. Along the way, you throw off all sorts of data and products, some of which might justify the end goal without ever getting there.

If Google as a business is maturing when it says it's trying to focus on fewer things, then you shouldn't be fooled into thinking that those core projects aren't being leveraged into other areas. Giving away, your API might seem strange to the monopolistic instincts of a room full of bankers. To a room full of software engineers they see it as a chance to mine more data and to use that data for further crazy projects.

This was a great lunch to attend. Anyone who got an invite and didn't show-up is just plain crazy. If BBY through Nick Dacres-Mannings had opened this to the public, I reckon he could have filled a pretty big auditorium with profitable, paying tech acolytes. And thanks to Alan Noble for sharing his insights.

Ciao!





Wednesday, 15 October 2014

IBCyclist Consultancy the website, some events and the spring cycling season opens in Sydney . . .

It's taken some time, but the Investment Banker Cyclist Blog is going to morph into the IBCyclist Consultancy. For long time readers there won't be any change to the way the blog is published. The idea is that for a new generation of followers interested in actively pursuing my services I've created a website that gives a basic outline of what I offer. 


The site is v1.0, and I'm asking people for feedback before upgrading using the professional design group that worked on the Beca Asset Management site for me in Switzerland. 

As this entry is more a short news piece until a longer piece tomorrow readers might wish to know my movements in the coming days. On Thursday I'll be at a lunch being hosted by the team at BBY in Sydney for a presentation and hopefully Q&A session with Alan Noble of Google. I'll be writing about the lunch for the blog in the coming days. 

On Sunday you can find me at the Sydney Spring Cycle. I'll be doing the 55km ride from North Sydney to Sydney's Olympic Park, and riding back to the eastern suburbs after a short break. Look out for green bib number "1770". 


There's a 100km option, but that's a bit boring as you make up the additional 45kms by doing laps around the Olympic Park. The ride home is about 25kms for me, and I'd be happy to share all or part of the journey with any of my readers. Look out for my one of kind Cannondale SuperSix Evo in red, white and blue.


After that I'll be riding from Sydney to Wollongong on November 2nd wearing bib number "4215". That one is a 90km ride for Multiple Sclerosis. I'll be setting up a donations page soon, for those interested in sponsoring me for a great cause.



Ciao!


Thursday, 9 October 2014

The "I'm going to need a bigger brain" BBY Disruptive Lunch

I defy anyone sitting in last Thursday's Disruptive Lunch at BBY in Sydney to correctly outline to me how the proposed computer chip from Brain Chip (http://brainchipinc.com) actually differs from current technology. Probably like me, if you were taking notes, you wrote down something like:
  • 5000 times faster than a normal chip
  • Mimics biological brain architecture
  • Learns tasks, rather than relying on software
  • "Spiking neuron platform"
It all adds up to my personal conclusion that I'm going to need a bigger brain. Brain Chip is offering a technology that for 99.99% of the population only exists in science fiction. Robert Mitro (CEO) claims that the technology developed by Chief Technology Officer Peter Van Der Made (see his new book: http://higherintelligencebook.com) is perhaps 25 years ahead of anything else currently available to industry. The chip will have the capacity of 10,000 neurons. That means little until you understand that the human brain has 86 million neurons. A fruit fly has about 3,000 neurons, which means if you're interested in the sounds that this fly species makes it should be possible for you to have the chip learn all the characteristics you need to build a detector. It's difficult to explain because Brain Chip is proposing something that is such a revolutionary leap that it comes under the heading of "if you build it they will come". I thought the best question of the day was "what are the limits of the chips learning potential? Say you had the chip learn how to hear like a human. Wouldn't it just keep learning until it had some type of superman like capability?" The answer was slightly ambiguous in that Mr. Mitro said that BrainChip sold the kit, but didn't set the boundaries of what the user could do with it.

According to the time-line, there's two years and $6m dollars between now and producing a chip. In between now and then it seems we'll see an example of the chip in action via the form of a car racing game that learns to drive itself. Apparently Google has taken an interest, as have various neuro-science bodies in the US. I asked Mr Mitro after the presentation whether that $6m figure was correct given just how revolutionary this was likely to be, and he stood by his statements. As an investor, I think it's right to be sceptical. To me, what Brain Chip is proposing is so big picture that it tests my limits of understanding. If you've spent too many hours reading Asimov then welcome to a new reality. This is the proverbial game-changer if they pull it off.

I felt far more comfortable when Hugh Geiger from Ollo Wearables (http://ollowearables.com) stepped up to the mic. The company's focus is on tech solutions for the aging population. It's a familiar theme at these lunches. I first encountered the business opportunities of a demographic shift in the late 90's when the Japanese equity market started to throw up vague ideas of baby-boomers retiring to the country to fish, play golf and ride bikes. What we didn't think of then was the tremendous drain this would have on government and social support structures. Ollo Wearables is looking to fill the gap in the market that exists between conventional communications solutions and fully managed aged care.

Ollo is focused on voice-centric solutions. Geiger comes at this from a familiar angle; he had an aging relative hurt in a home accident and was unable to get to a phone to alert the family. I've also had experience with this as one of my aunties slipped in the bathroom and died because she was unable to get help. Therefore, I can appreciate the Ollo's wearable communications focus. The technology focuses on voice-controlled dialling, but includes other software controlled sensors such as an accelerometer that tracks the wearer's movement and physical activity so that family members know immediately if the wearer has fallen. They'll also be other biometric sensors that will help build a picture of the state of your loved one. The device uses a conventional GSM transmitter. The key is the software's ability to put it all together. Ollo don't want to join the race to the bottom in hardware manufacture, but rather license their software. Mr. Geiger was sporting a star trek inspired necklace (produced by LG of Korea) that is similar to a device that was used recently for trials of seniors in Missouri.
Similar to the LG model seen at the lunch

Apparently the necklace provides the optimum compromise in terms of sensor and voice control. It's also an ergonomic issue, whereas a watch has problems both for use as a phone or as a sensor to measure falls, the neck has access to your voice centre, pulse (via carotid artery) and provides a better indicator for accelerometer measurements. Additionally the voice control functionality doesn't require the synthetic learning process that I've encountered with voice control in several cars I've owned. That's a difference maker when you are dealing with a senior citizen who may lack patience with technology. Put it on and use it immediately.

The revenue for Ollo comes from licensing agreements. The team has relocated to San Francisco. Ollo is a serious company and investors if given the opportunity should seriously consider any equity offering.

The first two companies were so hi-tech focused I think I'd burnt myself out by the time the joint CEO's for Posse (https://posse.com) / eCoffecard (http://www.ecoffeecard.com.au) / Beat-the-Q (https://www.beattheq.com) started their pitch. This one is a great example of something we're going to see a lot more of in the social media sector. This is a rationalization that is supposed to end, as so often happens with these things with a big winner. The land grab here is for 55,000 shops and about 500k users. When Rebekah Campbell (Founder and CEO of Posse) showed, a short video of what the new entity is all about my first thought was that I'm too old to embrace what I'm seeing. I don't have a copy of the video, but let me set it out for you:

  1. Business hipsters find café / restaurant on the app
  2. Enter establishment and activate app, which shows establishment's menu
  3. Place order via app
  4. Establishment accepts order and notes you have been geolocated to a specific table
  5. Food arrives, eat, and then you're prompted if you'd like anything else
  6. Pay via app and exit café / restaurant

All I could think was that Gen Y is going to kill the atmosphere at my favourite places. I'm already a little annoyed by people on smart phones. There's nothing more annoying than people on "ph-ablets" in low lighting environments "SMS'ing", etc. away. That, of course, is my problem, not Posse's. The problem for me is that the revenue model is based on up-selling establishments into the highest of three levels of analytical offering. If you own a café and have an MBA, you'll want to Posse to rationalize you're massive student loans and the 16 hours a day you spend working on your business. If you don't have the skills to use the stat packs, then Posse may make sense in a cost sense whereby you might save a headcount because of the self-service nature of the app. I remain sceptical on this particular segment. I have used eCoffeeCard and have recently signed up and reviewed a couple of local haunts on Posse (search: The IBCyclist Collection).


As an investor, I recommend not trying to pick winners in this market sector. Instead if you are committed to this segment you need to take a portfolio approach. I remain engaged, but not committed.

For those who've been wondering, I've finally taken delivery of my $450 Institchu suit. My plan is to review it after a couple of more outings. First impressions have been good. I went into the Institchu pop-up office in central Sydney to take delivery. I was surprised by how busy the space was, but the staff was friendly, although a little surprised when I said I wanted to try it on. The suit was delivered as specified by me except for the coloured felt I asked for under the collar. I'm not a particular fan of that particularly English affectation, but ordered it to test Institchu. It's not a deal breaker, but if you're fussy, it might be annoying. I did get working sleeve buttons and everything else I had specified. The suit came to me on wire hangers and the staff member needed to be asked for some type of covering for transportation, which was duly supplied. An acquaintance who took delivery via mail told me he was a little miffed that his suit was tightly folded in a box and needed pressing before wear. Look, you get what you pay for, and given the price I wouldn't quibble about the wire hangers or perfunctory packing. Please look-out for the full review soon.

Ciao!




Monday, 29 September 2014

A not so #disruptive lunch? Disintermediation, integration and maintaining a cadre of thinkers in a changing world.

Sometimes a disruption comes in different forms and a lot of times as I've said previously it can take the form of a slight tweak on conventional thinking. Thursday's disruptive lunch at BBY (twitter: @BBYltd) in Sydney was rather dichotomous in that it presented us with a truly radical disruption in the form of a Bitcoin pioneer and an old world firm that was looking to transform itself by acquiring disruption by acquisition.

When Ted Pretty stepped up to the podium at last Thursdays Disruptive Lunch at BBY, he looked like anything but a disruptive force in Australian business. In fact, Mr. Pretty looked like your favourite uncle taking a break from tinkering with machinery in the garden shed just long enough to lecture you on some esoteric subject. Instead of 30mins on the virtues of a good torque wrench and lawn mower maintenance we got an insider look at the reshaping of Hills Ltd. (ASX: HIL).


For my non-Australian readers Hills came to prominence in Australia on the back of the post-war housing boom with its ubiquitous Hills Hoist clothes line. Every house seemed to have one and this enabled Hills to prosper and grow into a conglomerate centred around various products that leveraged   the metal fabrication core that drove the company. Today Hills is a much different beast and Mr. Pretty went through his management team's current thought process:
  • Economic numbers in Australia are of concern and likely to point to a downturn in the next 18months. Given this the challenge for Hills is to decide whether to buy bolt-on businesses now or wait for the economic cycle to reduce the entry cost of such acquisitions
  • Focus on security and health as these sectors are growing at 6 - 8%  per annum. The investment case is compelling with the demographics of an ageing society being the main driver. Security leverages similar metrics with some extra twists (see below)
  • On the "hardware" side margin compression remains the one constant. Race to the bottom requires a shift to value-add via back-end software enhancements and a move into smart overlays to connect the on the ground sensors
  • Security is the ultimate disruption concern for the world. This divides up into the now well-documented areas of terror, global crime, social behaviour and economic terror 
  • The challenge for Hills is to leverage their existing "foot in the door" and increase the revolving revenue stream possibilities
  • The business is already in a better position to track product trajectory by knowing more than what and when they sold a product, but also to know where in the cycle their customers are and therefore offer appropriate upgrades and replacements
The central logic of all this seems hard to argue with within the Australian context. It helps to know that Mr. Pretty spent a significant period at Telstra Australia during the transformative 1997 - 2005, so has the advantage of being involved in a business that had to change from hardware to software if it was going to grow. At the moment I got the sense that Hills is still struggling to lift what I'll call "add-on" revenues, though I haven't dug into the numbers and the full scope of the businesses they've been buying. If I understood correctly (and I'm happy to get feedback on this) "services" revenue is at about 10%. While Mr. Pretty didn't give us a target number on where he wants this portion of revenue to go I got the sense his ultimate goal with Hills is to turn the business into a consultancy of sorts. Looking at my notes, I wrote down: Does Ted Pretty want to be Louis Gerstner? Of course, Gerstner is famously credited with saving IBM by turning it into a consultancy based business during his period as CEO. Given that Pretty was at Telstra when Gerstner took an axe to IBM the chances are he's well-versed with the play book. The trouble is its an easy strategy to understand, but a hard one to pull off as it relies on buying the right businesses at the right time and cutting old product lines to finance the transformation. IBM got rid of the PC business to Lenovo because of margin compression, Hills probably still has a few businesses that could go out the door in a similar fashion. Ted Pretty and the team have some challenges and look determined to execute. I have no view on the stock price, but I like the idea as an investor that Hills is of a size that makes it easier to monitor the various acquisitions, divestments and the effect on the balance sheet. Think about it this way, if Google buys a $5bn business it's a bit like throwing a stone in the ocean, the effect is minimal and hard to see. If Hills buys a $10m business, it's likely to have an effect that is far more observable.

Zhenya Tsvetnenko is the Executive Chairman of Digital CC Ltd (ASX: DCC) which styles itself as a Bitcoin-centric business offering various services to companies and individuals who want to participate in the Bitcoin currency. I think this was one of those rare occasions at events such as this where I gave up taking notes as I struggled to get my head around the Bitcoin world. Essentially I'm still running to catch-up with the likes of Mr. Tsvetnenko, but here's where I am.

Bitcoin is a digital currency invented (if that's the right word) to dis-intermediate various financial institutions from transactions involving two parties. Consider this; you contract to buy a product from a producer, but in order to complete the contract you pay a fee to at least one other third party to facilitate the movement of the agreed consideration between the two of you. That fee may be in the form of the banking charges on your accounts, a credit card fee or some other charge added by a wire transfer service. The value-add by these groups is minimal to the contract itself and therefore in the world of Bitcoin is a cost that could be reduced at a minimum, or better still eliminated. To accomplish this the inventor(s) created a cryptographic protocol that essentially awards Bitcoins to those working to administer the system. This is called mining. The protocol throws off about 25 Bitcoins per hour and is bounded by an upper limit of 21m Bitcoins. Now this is where it gets fuzzy for me because I think as Bitcoins are produced is gets harder to solve the encryption and it costs more and more to be a successful miner because the amount of computing power you need to participate expands continuously. It's kind of like an arms race. In the meantime part of the mining process is the administration of the public ledger. Every Bitcoin transaction is available on the ledger. That means you can trace the exact owner of each bit coin (or fraction thereof). Having said that, the transactions themselves are anonymous, so prima facie you can see where central banks and governments might have a problem with this. The upside, of course, is complete control of the money supply making it inflation proof (given the upper boundary), because unlike fiat currencies issued by Fed, ECB, BoE, etc. Bitcoins can't be produced ad infinitum. For mine, it's like being back on the gold standard when it was at its strictest.

Readers of this blog will know my concerns regarding the current fashion for QE amongst central bankers, and this is in essence what Bitcoin is trying to solve. Bitcoin in a way is the ultimate answer  to an ageing world where the biggest risk the individual has is that he or she wakes up one morning to find the cash they have in their bank accounts is worth progressively less. It's not as though we haven't seen this phenomenon before. It's only a few years back that Zimbabwe's central bank decided to keep the printing presses rolling until the currency was worthless. For me, Bitcoin is the synthesis of all my own and many other investors most neurotic concerns about the global monetary system. That doesn't make it a bad thing, rather it shows once again that man is extremely adaptable to his environment when challenged by even the most disruptive events. The key is hopping on at the right time.

When Zhenya Tsvetnenko finished his presentation, I looked over at Ted Pretty to see his reaction. I think like me he was still trying to take it in. I know at least one of his team was there and is very pro Bitcoin, so I'll guess he had the basics already, but answers, well that might be a bit more difficult. It's hard when you've got a business and business plan that you see as transformative to consider that there's even bigger forces at play that might even scupper your best ideas before the ink is dry on the contract to complete a transaction. It's happened to me, and I'm betting it's happened to most of my readers. Buying a copy of "Bitcoins for Dummies" probably isn't going to be enough given the various vectors that could influence the course your investments might take. You can't get a bigger brain overnight, but as always you can choose to confront the change rather than ignore it.

Generally CEO's have a pretty high opinion of themselves. Why shouldn't they, especially where the profits and growth match the hype? I saw this on my twitter feed over the weekend, and I responded as follows:


It seems somewhat nonsensical to worry about future growth when your most successful tactic has been to cut deepest fastest since the crisis. I've always been a fanboy of Caterpillar, a company who responded swiftly and effectively to the downturn, but even they reached the limit of what's possible under this plan. Consider this, if your company is being driven by a top-down strategy of "shrink to grow" should you be surprised when those executing the shrink part have lost the ability to respond when and if the J-curve comes?

The surprising thing to me is how often I've heard that whole departments at banks no longer exist, mainly because they're deemed as unprofitable because of the volume or regulatory capital required to operate them. It reminds me of armies post-WW1. The defence establishments caught most on the back foot by 1939 were those that essentially eliminated their cadre of further leaders. I'm already seeing the first signs that the investment banking world is fighting back against its own establishment. Take last week I had several meetings and teleconferences with individuals displaced from financial institutions looking at a way of reconstructing business lines at a lower cost. I wasn't surprised to hear that in my favourite financial sector of Peer-to-Peer lending that investment bank Jefferies had successfully securitised part of a company's loan book. It seems funny, but also logical to me that even though P2P was supposed to dis-intermediate banks that what it may have, in fact, created was an opening for the potential losers to become winners again. I don't know the securitisation team at Jefferies, who did this deal, but I'm sure that they understand the lifeline that they've been thrown. Recently I looked at a similar type of use for the loan book cash flows of a P2P lender and came to the conclusion, that someone would have to step-in to scale the returns to facilitate the growth of the business.

Finally, I've spent a lot of time in the last week considering the CalPers decision to axe hedge funds from its portfolio. On the face of it, I bet whoever it was at CalPers who finally pulled the plug would say it was the easiest decision they ever made. That to me seems very short term thinking and is designed to hide their own underperformance. Consider the current environment. We have ultra-low volatility in nearly any market you care to contemplate. Add to that a huge limitless put option sold by central banks via QE. How then does a hedge fund manager differentiate him or herself and produce alpha?

It's interesting to consider the correlation between HF performance and volatility. On one hand volatility is often seen as a "dilutor" of performance while on the other hand it opens up the ability for funds to express themselves through situational developments. If an index such as the S&P 500 experienced mild volatility (+/- 1% per day) for an extended period I would bet on Alpha returning. Therefore if like me you're watching as the Fed and the BoE turn from doves to hawks you'll no doubt be considering the return of volatility, and the likelihood for renewed differentiation amongst investment alternatives.

As to the question of HF fees, it seems that funds will need to adapt to the new environment by openly auctioning their capacity to investors. They should drive fees  and salaries down, but produce more efficient and sustainable winners.

CalPers may have surrendered to the "shrink to grow" strategy at the very moment the cycle was turning and in doing so may have released the cadre of professionals they'll most likely need in the coming years. Those let go will be free to create their businesses that will ultimately disrupt the behemoths that once were their employers. I think Mao may have put it best in considering his own problems running a nation as vast and complex as China:

Letting a hundred flowers blossom and a hundred schools of thought contend is the policy for promoting the progress of the arts and the sciences and a flourishing socialist culture in our land. Different forms and styles in art should develop freely and different schools in science should contend freely. We think that it is harmful to the growth of art and science if administrative measures are used to impose one particular style of art or school of thought and to ban another. Questions of right and wrong in the arts and sciences should be settled through free discussion in artistic and scientific circles and through practical work in these fields. They should not be settled in summary fashion. 
(On the Correct Handling of Contradictions Among the People, February 27, 1957)

Ciao!


Monday, 15 September 2014

Another disruptive lunch: @BBYltd @lawpath @gocatch @safesitetech and Soliton Music

Last weeks latest edition of the BBY Disruptive Lunch series had me pondering the following question:

Exactly how radical does a business plan have to be in order to be seen as disruptive?

For some reason investors I've spoken to somehow regard disruptive businesses as being inherently revolutionary, but that's not always the case. Sure, a business can come along with a completely new technology that challenges the way a service or product is delivered, produced, maintained, enhanced or challenged, but more often than not it's a incremental shift in thinking that can be successfully disruptive. In fact it's probably the biggest, most traditional industries that find it hardest to defend themselves in the face of the smallest shifts. The reason for this is often the mindset that says . . .  "its worked like this for many years and is providing a stable and even growing return for our investors. This is something we've seen coming and we feel we can adequately deal with it." The companies that I was lucky enough to see presenting at BBY last Thursday are in my way of thinking representative of small shifts with larger consequences, rather than radical challenges in themselves. For investors that can mean a safer, more easily understood investment case, but also one likely to, if rightly combated by the entrenched leaders more easily repelled if directly challenged while still in their infancy.

Safe Site (http://safesiteapp.com) CEO Peter Grant presented his work site safety app that was easy to understand and immediately accessible to anyone who's ever picked up a smart phone type device. In fact if like me you've used the "Snap, Send, Solve" app to report anything from dumped garbage to fallen trees to your local council you'll immediately understand the simplicity and flexibility of the Safe Site offering.


For those new to this type of workflow manager it works by identifying a problem and automating the reporting process. Take for instance an exposed cable on a building site. On a huge construction site it's obviously not enough to start wrapping electrical tape around it etc., the fault is a) likely to be far more dangerous in an industrial setting, b) perhaps emblematic of a larger fault in systems of construction, supply or manufacture, or c) applicable across multiple worksites in terms of solution. All of this requires a complicated and somewhat time consuming production of documents and reports. Safe Site simply streamlines this process and automatically produces these reports at first contact and ensures their delivery to appropriate managers, services and regulators in a timely, logical and traceable manner. Furthermore it allows for the systemised collation of safety data useable by everyone from practitioners, insurers and I predict investors in a project so as to best provide a safe and minimally disruptive worksite.

Safe Site as a business is at it's core a subscription based service charging on a per user basis, though single tradesmen can use it for free. It currently is already being trialled in Australia and impressively in my view the US where it is already in use in California. My only question given my own use of Snap, Send Solve was just how do they propose to protect their idea from like minded disruptors or current stakeholders (surely a smart Union could do this)? Well Peter is very logical in his defence and clearly emphasises his own engineering background and the experience of members of his advisory board. For mine there's still somewhat of a "land-grab"element inherent in the business plan. The company is taking a softly-softly approach with the construction unions and trying to work both the top-down and bottom-up line. There's no guarantee of success, but I know that with the current Royal Commission into Unions and various investigations into the construction industry in Australia there is at least some fertile ground and first mover advantage for the team. The fine balancing act that Safe Site will have to execute is not simple, but is at least understandable and investors and practitioners alike gravitate to industry wide standards in this field and therefore should keep a close eye on the adoption rate of the app.

I use "App Annie" (http://www.appannie.com) to track app download charts and stats. The site has various tools for estimating metrics associated with an app. It's not free to get the higher end stats, but  it does provide a basis for understanding the iOS and Android marketplace. Note this down.

There was at least one existing investor in GoCatch (http://www.gocatch.com) in the boardroom on Thursday. I had been told about this Taxi booking app a few times over the last 6 months, but hadn't got around to taking a close look at it due to the fact that I rarely catch taxis anymore thanks to my trusty bikes and my proximately to reliable public transport.


GoCatch caught me (pardon the pun) in a about 3 minutes of CEO Ned Moorfield taking the microphone. For international readers of the blog who are early adopters of Uber you'll need to understand that regulators and users of regulated car services in some countries have been less than enthused about the laissez faire nature of Uber. In Paris and Berlin the existing industry has fought back fiercely against the private market place by playing heavily on safety concerns and reliability issues. GoCatch is that safe halfway house for users and drivers in that it challenges not the notion of regulated taxis per see, but rather the entrenched infrastructure associated with them.

The disruptive nature of the company, here in Australia at least is a challenge to the cost structure and service delivered by dominant credit service Cabcharge. Right now drivers pay a commission to cab charge and users of taxis also pay a premium to use the service. Right now the charge is about 11%. Go Catch brings that down to 5% and nets out about 1.5% of the journey charge. They get a commission from drivers as well because they in effect skirt around the existing Co-ops and their booking service which charges drives a regular fee no matter how reliant they are on the service itself. In fact drivers by regulation have had to be associated with such a Co-op, but this is changing and the State of Victoria is introducing legislation that allows drivers to be 100% independent, yet regulated and therefore they can adopt the user pays model that GoCatch essentially is.  So far they've got 4,000 drivers using the service and in August managed 45,000 trips in the months and are on track for 800,000 in their 2014 year. Current average fare per journey is $29. They predict this to ramp up to 2 million in 2015 and 4 million in 2016. This will still only represent 1 to 2% of all journeys in Australia, so they would say they're being very conservative.

Whats in it for passengers? Well first up the system instantly gives you a map with all GoCatch taxis in your vicinity, it even gives you idea on how busy they are. You book by entering your location and I believe a responding driver can see you on their app and accept the business as they see fit. You link your account to a credit card or Paypal and you can add a tip and even rate a driver at the end of your journey. For business users the app allows you to collate your expenses without the usual paper receipts that really are the bane of business travellers . . . I really don't know how many times I've lost a little piece of paper for a $50 cab fare to the airport and have been told by a company accountant "too bad". I asked two taxis drivers on the day of the presentation that I had caught the old fashioned way whether they'd heard of or currently use GoCatch? The first driver said he's heard of it and the owner of his taxi was going to get it. The other driver just said "why would I want that?" I went through the cost structure and got his interest, but I think he thought I was going to try and pay him with Bitcoin or some other exotic method. I told both drivers about the Victorian legislation change and how NSW was likely to adopt the same policy and the fact they weren't going to be locked into a network with its cost. GoCatch was for them a viable alternative and it got them both listening to different degrees. I'm positive that the deregulation of the Co-ops and some further direct marketing to the drivers will pay dividends for GoCatch. The fact that GoCatch is offering benefits to both the drivers and the passengers seem to me a big advantage and investors only then have to assess whether the existing players are determined enough to fight back on both cost and ease of use. Current evidence is that GoCatch may succeed in establish a bridgehead that can at least be fortified and defended in the short term.

Law Path (www.lawpath.com.au) to me was a bit of a cut and paste of US success story Legal Zoom. I'm sorry if that's somewhat dismissive of the effort going into the company, especially given the advisory board has on it a member from the Legal Zoom team. Basically Law Path offers quick and cheap access to standard legal documents that you might require in setting-up and maintaining SME's of various varieties.


Obviously that encompasses the usual partnership agreements and company formations. The key to Law Path is building a supporting network of lawyers who are willing and able to act as the second level support for documentation that needs to be customised to the client.  This also means that they can also act as referral system for what they say is an over-supplied market place. CEO Damien Andreasen is not a lawyer himself and is more like you typical serial entrepreneur. That's not a bad thing if you're trying to disrupt an industry that has a pretty big wall around built around it both in terms of jargon and licensing. He says they have 510 lawyers have already signed up, but because of time I never got a chance to ask him whether that meant 510 individuals or firms?

Law Path is both subscriber (the lawyers) and obviously user (the client pays). I didn't catch the charges for practitioners. The scalability is also something I'm wondering about, as is the size of the Australian market and its entrepreneurial impetus. As an investor I like the story, but wonder if I wouldn't be better placed if I invested in Law Path UK or Law Path Germany. The positives are that the team Law Path has assembled seems to have enough debt and they have some first mover advantages and there's margin and excess capacity. Is that enough? We will see.

Just as an aside wouldn't it be great as an investor if you could see the usage stats for Law Path or in the US, for Legal Zoom. The correlation to economic activity in the economy must be very strong. I know you could just track the financials, but that in itself might tell the whole story.

Finally I got my second chance  to here from the team at Soliton Music (www.soliton-music.com). I was luck enough to have a one on one with them back in June and wrote up a business summary for an investor I thought might be interested. I said at the time I wasn't really "Mr. Entertainment Industry" so needed to take a crash course in their space.

Soliton Music is an Asia Centric business currently centered on music streaming in Hong Kong, they have the rights to 1.7m+ songs currently. These are delivered via partnerships with various HK telcos. They have approximately 20,000 subscribers. The company intends to reposition itself towards live streaming of concert and associated events for which it will charge a variable fee. Delivery is via web / app. The current app will be replaced around the time of the company going public. At this time they will seek to port across their Telco based subscribers to form the core of the new customer base.
The company aims to list on the Australian Stock Exchange in November.

Soliton’s plan is highly dependent on acquiring the rights to concerts and live events. The intention is to do this via the acquisition of individual promoters. They say that typically these promoters have a 12 – 18 month stream of events in their books and can be acquired for USD 1- 2m per promoter. None of the management team to my knowledge have ever executed the buy out of such an agency and as such are by their own acknowledgement dependent on their biggest non-executive shareholder to be mentor in the targeting process of said promoters. After the acquisition of a promoter Soliton will acquire the rights to the concert books and associated live broadcast rights. Promoters usually take 10 – 15% of the gross. Soliton says they can offset between 30 – 60% of an event’s cost by co-producing with record labels. Soliton’s main value-add will be the on-sale of the events via live streaming for up to USD 10 per event. This amount will vary widely depending on the artist involved. It may also vary depending on whether the subscriber decides to accept advertisements during the show, though this feature will not be active during the building of critical mass. It is envisaged that associated events will be added to various concerts such as “meet the artist” broadcasts where the performer will share pre-concert talks and fan “greets” via streaming. These will attract a fee. Other opportunities will include direct merchandising involved with the event.


Any investor will ultimately have to be convinced that the management team is capable of building a larger database of subscribers in a limited time period. It would be comforting to see an example of a recent transaction where a promoter had sold out to a larger entertainment entity in Hong Kong. Perhaps I'm too old and vanilla for this one, but for the hipper, more Asia aware it's probably worth investigating the segment further.

Ciao!