Monday, 4 August 2014

How to avoid being as frustrated as Warren Buffett . . . Qwilr . . another BBY lunch (Part1)

The third presentation of the day last Thursday at Sydney investment bank BBY had me on the back foot for a few seconds. Quiller, kwiller,  . . . QWILR . . . got it. Dylan and Mark . . . OK, who's who and what's their full names and who does what? Dylan Baskind & Mark Tanner . . . now which is which? So Dylan is the web designer and Mark is the ex-Google guy and there's three other staff members. You get the picture? The presentations at these things always start off the same. If you get invited it's typically sink or swim in those first minutes. If you're lucky the idea and the proposal get your endomorphins flowing as they did in my brain and as is so often the case with me I tried to get a fix on the business from a problem in the past.

Few investors where I now live can recall the September day in 1987 that Warren Buffett bought $700m of convertible preference shares in Salomon Brothers Inc. that helped then famed anglophile Chairman and CEO John Gutfreund to stave off the moves of one of those typical 80's buccaneers Ronald Perelman. Those prefs paid 9% and were convertible after three years at a 27% premium to the then current share price of $30. Get the math? 3 x 9 . .  etc? Famously Buffett cut a similar deal with Goldman Sachs during the GFC, but lets leave that to one side. Those prefs led Buffett on a decade long odyssey including ten painful months as acting Chairman that left the sage somewhat scarred and at times quite reflective on what he'd seen in investment banking. 
As I sat in that boardroom at BBY my mind turned from the Qwilr presentation to the classic 1991 Buffett letter to Salomon shareholders and to the paragraphs on the compensation culture at Salomons, specifically:
". . .  the compensation plan did not take this extreme unevenness into account. In effect, the fine performance of some People Subsidized truly out-sized rewards for others. It would be understandable if a private partnership opted for such an egalitarian, share-the-wealth system. But Salomon is a publicly owned company depending on vast amounts of shareholders' capital. In such an operation, it is appropriate that the excess earnings of' the exceptional performers-that is, what they generate beyond what they are justly paid-go to the stockholders.

Of course, it is difficult to quantify performance in many vital jobs, such as compliance, audit, funding, and research. For these activities, and for operational and support jobs as well, Salomon employees should normally be paid in line with industry standards, whether profits are high or low. Our compensation plans must also both reward cooperative, for-the-good-of-the-firm behavior and recognize that some business units earn relatively little in profits but deliver valuable, if hard to quantify, collateral benefits to the firm.

All that said, there remain many jobs for which performance can be concretely measured and ought to, be. In these, employees who produce exceptional results for the firm, while operating both honorably and without excessive risk, should expect to receive first-class compensation. On the other hand, employees producing mediocre returns for owners should expect their pay to reflect this shortfall. In the past that has neither been the expectation at Salomon nor the practice."

One of the most frustrated people in an investment bank, any investment bank is invariably the head of research. You see no matter what they tell you it's often difficult to tag an analyst, especially those not used to grabbing headlines with particular income streams. That means compensation can be somewhat haphazard. All too often the metrics asserted look like a cross between a beauty contest and a time and motion study. If a pension fund / client thinks a particular analyst is of value to their fund managers they'll vote for him or her in a particular survey. Sometimes, if they're really motivated they'll specifically tag a transaction with the analyst name. The bank will then add on such things as research produced (may as well just weigh the reports), presentations conducted and work conducted for the corporate finance department (producing models, helping at a deal pitches etc.). None of this easily incapsulates day to day influence or change in performance. Take the surveys for example, they're often self-fulling in the stickiness they have to a particular analyst. Fund managers are far too easily swayed by the reputation of an analyst and this can mean a number one ranking has an excessively long tail on it. Consider this; what if a head of research or CEO knew the daily influence a particular analyst had on the market not just from a quarterly survey ticked and dispatched in 5 minutes, or from emails or a brief comment caught in the lifts after a presentation ("Jane really knows her stuff . . . we better get a one on one before we get bigger in this position . . .")? What if the management had some real unbiased metrics to add to the piles of research reports? 

Well welcome to Qwilr.

Qwilr rethinks the delivery of all those kilograms of research reports and sales pitches. In fact it goes a lot further, but as I was sat in an investment bank boardroom the correlation was a little too good to miss. Who exactly is reading these documents? How much time do they spend on it and what exactly are they reading within the document? And importantly are they in a position to action positively a transaction as a result? Well from what I saw Qwilr is about to hand that to me on a silver platter and many businesses may be changed overnight.

The team at Qwilr present a very simple formula; change dumb documents (pdf's etc.) into smart web pages that track the reader experience and deliver the data back to the sender. Furthermore get control of your output with the ability to instantly dictate who gets to see or retain the information. How many times do staff send out mails with valuable and expensive work attached that gets farmed constantly by people? What if a target customer moves from a company? Wouldn't it be better to be able to turn-off all that data in an instance, ready for someone to say: " . . . anyone see that recent piece on shale oil production from XYZ bank? Didn't Charlie used to deal with a person there? We need to get them in and find out how we move on now he's left us?" Bingo, instance opportunity. Now that's very simplistic, but a reasonable example. 

I was lucky enough to be sitting next to Dylan after the presentation. As an aside here's another hint when you attend these presentations . . . try and sit next to a person not in a suit who looks a little out of place. They'll be the ones presenting. If you luck-out and their presentation gets you interested you'll have first chance to ask questions as the other suits leave at the end. I asked Dylan a couple of things and while it would be unfair to give you his answers I can give you a rough idea of what I asked . . .

Idea . . . this is yours 100% right?
Security . . . so how is an HTML more secure than a pdf?
What type of metrics can you deliver?
How exactly do you know what the person is reading?
Who in business are you talking to? Who's already committed?

Anyhow it went on and to be honest I could have spent a couple of hours on this one such is the opportunity. 

Qwilr is only seven months old and as such is a rare opportunity for someone like myself to see something in tech at a stage before the angels and boffins swarm the offices. I'm meeting with Qwilr on Tuesday for a coffee and in line with my usual practice at these follow-up meetings I don't publish their content on the blog. I'm lucky in that I can basically ride my bike to the meeting. As a NY hedge fund manager said to me once when I was pitching my commodities fund " . . . look Mike, Geneva? We used to go there, but since the crisis unless you're a cab ride from one of our offices we take the view that we don't trust you." I considered that harsh at the time when we were struggling to attract capital. I'm not so harsh with companies like Qwilr, though yes it's an advantage to be close to any potential investment, but it can also be hindrance. Investors like dieticians need to start from the point of all things in moderation.

And finally on Salomon Brothers . . . They ended up being taken over by Travellers / Citi bank / Citigroup. When Buffett took over Salomon's the leverage was 37:1. When Lehman Brothers went under during the 2007-8 crisis it had 30:1 leverage. Buffet's $700m was finally worth about double what he paid for it in 1987, which he considered somewhat of a failure. His later investment in Goldman Sachs paid off in a similar fashion, though he managed to avoid having to be directly involved with the management and he exited as quickly as he could. 


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