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.


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 if you'd like to hear more about what I thought of this and other events I've written about in the blog.


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 ├ęcoles" 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