Tech. Exit Trends in Today's Hot Markets [Webinar Invitation]


 

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Webinar Invitation

Tech. Exit Trends in Today's Hot Markets

Monday, September 29th

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My Wednesday column as to tech. opportunities far from Silicon Valley was well-received, but frankly left a lot of folks wanting more.

Mostly what was asked was a variant of a common theme: How can I apply the wisdoms and best practices of the Uber - successful Silicon Valley entrepreneurs and investors to my business, or to the one I advise, or are invested in.

It was almost a hope against hope, something that most unfortunately are almost too scared to dream about…

...Having / being involved with a unicorn of one’s very own.

How important is this?  Well, given that last week's $25 billion Alibaba IPO was greater in size than 2014’s other 154 IPOs - combined - even slightly improving one's "Unicorn Landing" odds has enormous expected value.

Webinar Invitation

So I and my research team collected and analyzed some of the best research on the topic, from the Kauffman FoundationNVCAPricewaterhouseCoopers,Dr. Robert WiltbankHarvard University, and TechCrunch’s Aileen Lee, including:

- Categorizing the common attributes among 39 companies started since 2003 that are now valued at more than $1 billion

- The relative likelihood of success of enterprise (B2B) versus consumer - facing (B2C) business models

- How the great liquidity in today's market, with some estimates showing more than $1.5 trillion in cash being held by strategic tech. buyers and private equity firms, is impacting deal modeling and valuation analysis (all the way down to the startup stage)

- How and if yesterday’s report from Harvard University that for their endowment VC return for FY 2014 was 32.4% (compared to a 15.4% return for its total portfolio and the S&P 500's 21.38%) was an outlier, a harbinger of an over-heated market, or a reasonable return expectation given the high variance and the illiquidity of the asset class?

We put it all together and boiled down the most essential and actionable points, and are going to share our findings via webinar on Monday at 2 pm ET / 11 am PT.

Do sign up now via This Link

I do look forward to your attendance and feedback!

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Far from Silicon Valley: From Startup to IPO?


 

I had the good fortune to moderate a panel at last week's IBA Silicon Valley from Start-up to IPO / Exit Conference.

With entrepreneurs, venture capitalists, attorneys, and investment bankers from over 18 countries represented - from places as far afield as Switzerland, Singapore, and Spain (and Santa Monica and Silicon Valley!) - it was a truly international gathering.

Predictions were shared ranging from the outcome of the Scottish independence vote (incorrect) to Alibaba’s 1st day’s trading closing price (correct!), to animated discussions on the differing perspectives on Internet privacy in the U.S. and Europe.

But, the main thrust of the conference call was quite simple.

It was an inquiry, especially from the conference’s international attendees, as to how and why such an incredibly high percentage of the tech. start-ups that turn into “Unicorns” - businesses with exits via IPO or acquisition of greater than $1 Billion - emanate almost exclusively from the United States, and far more specifically from Silicon Valley.

How concentrated is this phenomenon? Well, as shared by Doug Gonsalves of Mooreland Partners, more than 70% of these Unicorns - names like Dropbox, Airbnb, Facebook, Splunk, Uber, Waze, LinkedeIn, and Palantir - were born and are headquartered in a “30 mile circle around San Francisco Airport.”

The “top down” effect of this cannot be overstated.

These huge exits and investor wins drive the fact that the Bay Area - with less than 6 million people - ingests close to 50% of all U.S. venture capital funding, which in turn is four times as much as in all of Europe.

This in turn drives an as large disparity in the number and quality of tech. startups and innovation emanating from various points on the globe.

Now, my perspective on this concentration has been mostly as an American businessman, as one that lives and works in Los Angeles (which may seem close to Silicon Valley, but to those who know both places can attest are worlds apart).

But visiting with entrepreneurs and executives from Europe, Israel, India, Singapore, and beyond brought the matter into much sharper relief.

Gil Arie of Foley Hoag shared the Israeli perspective - one where the best tech companies there as often as not are making the simple and powerful decision to move themselves (and their families) from across the globe for a Valley presence.

Sure, these companies can (and prefer) to build engineering teams in the lower cost, talent rich environs like Israel, India, Eastern Europe, etc., but for the “top of the pyramid” stuff - strategy, product design, capital formation and funding – being in the Valley feels like a necessity.

But expressed also was a strong counter-balancing sentiment, a deep desire to prove that world and industry leading technology companies can be born and grown far from Sand Hill Road.

And surely it will be so.

For this ambition - always in abundance in the world's best entrepreneurs - to build something that is theirs will eventually push back on the Valley's admirable yes, but also unnatural hegemony on global tech innovation and wealth.

And the great thing is that it will be far from a zero sum game.

Just think about it - if even a small fraction more of the world's Seven Billion People could live, work, and dream in a culture as forward and possibility - filled as Silicon Valley's…

Anything is possible, is it not?

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Why NOT to Invest in VC – backed Companies


 

The typical wisdom regarding the appropriate financing course for a new company goes as follows:

1. An entrepreneur starts a company in classic "bootstrap" fashion - with a combination of sweat equity and their own financial resources. This usually consists of personal savings, credit cards, and small loans from relatives (Mom, Dad, Uncle Bob, etc.).

2. Through connections, or through a chance meeting at a networking or social event, an angel investor hears the entrepreneur's story, likes them and their technology, and on the spot, writes a check to provide the company with its first outside financing.

The angel then introduces the entrepreneur to his or her wealthy friends and business connections who, based on the good reputation of the referring angel, also invest.

3. With this seed capital – more often than not totaling between $100,000 and $1,000,000 - the company accomplishes a number of key technical milestones, gets a beta customer or two, and then goes on a "road show" to venture capitalists around the country for capital to “scale” the business.

This venture capital financing - usually between $3 and $10 million - is the first of a number of rounds of outside investment over a period of three to five years. With this capital, the company propels itself to $50 million+ in revenues, and to either a sale to a strategic acquirer or to an initial public offering.

4. With the exit, the entrepreneur and the original angel investors become fantastically rich and are lauded far and wide.

5. The cycle is then repeated - with the original angel investors now joined in their investing by the once impoverished but now wealthy entrepreneur.

6. All live happily ever after.

It all sounds wonderful and it is. The only problem is that it almost always a fairy tale.

What really happens is more like the following:

A. The entrepreneur pours their lives, their fortunes, and their sacred honor into their company- at great personal sacrifice to them, their families, and everyone connected to the enterprise.

B. A "black swan" investor appears out of the blue and backs the company - less impressed by the technology than by the talent, desire, and grit of the entrepreneur.

Technical progress and market traction are much slower and cost a lot more than anticipated. There are a lot of dark, hard days.

C. There is considerable internal debate around whether or not to solicit and/or accept outside venture capital. For most companies, it is simply a non-starter. Management has the wrong pedigree, is geographically undesirable, competes in the wrong industry, and/or has a business model that lacks "scalability credibility" with the venture community.

D. Usually unbeknownst to all, the decision around pursuing or accepting a venture capital round will be the most important factor in determining the investment return for the founder and the original angel investors in the company.

But here is the key – contrary to popular wisdom it is negatively correlated.

Yes, you heard me right – multiple research studies, including from the Kauffman Foundation, have shown that when you remove a follow-on venture capital round from a founder or angel investor-funded company, that expected returns skyrocket.

This is very counter-intuitive but critical insight for emerging company entrepreneurs and those that back them to grasp. It is driven by the following:

•    The Best Metric for the Health of a Company is Cash Flow. By definition, companies that receive venture capital cannot fund their businesses from operations, and thus need to seek outside capital.

This leads to a lot of negative selection with venture capital - backed companies – whereby the sample of companies that need venture monies are by definition weaker companies.

•    Venture capitalists Have Very Different Objectives than Angel Investors. Venture capital funds are usually 7 - 10 year partnerships whereby the general partners - the “VC” - manage the capital of the limited partners, usually institutions (endowments, pension funds, etc.).

At the end of the period, all profits and proceeds are distributed to the various partners on a pre-determined split. These splits are normally such that the VC needs to obtain a “highwater” return for their limited partners before they, as the general partners, see any return.

In practice, this creates a significant incentive for the general partners to hold on for an extremely large investment return, and to be reasonably indifferent regarding smaller (less than 3x returns).

As a result, the VC will often block a portfolio company from harvesting a very attractive, but not home run, return.

•    Venture capitalists Cut Tough Deals. Venture capitalists for the most part are very nice guys and passionate about entrepreneurship, but they are not shrinking violets. And they hire very aggressive securities attorneys to represent their interests.

This combo all too often leads to various forms of deal unpleasantness, like cram-down rounds, liquidation preferences, and change of control provisions, which in turn, often lead to unhappy founders and angel investors even in somewhat successful exits.

My suggestions for the investors seeking emerging companies to back?

First, look for "one and done" financings - companies that need just one round of outside capital to propel them to positive cash flow.

Second, look for companies that have short and realistic liquidity (exit, IPO) timelines.

And third, don’t get star-struck by big venture capital interest in a deal. It is often a double-edged and very sharp sword. 

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What We Can Learn from One of the Greatest Investors of All Time


 

On the cover of this week’s Fortune Magazine is PayPal founder and famed technology investor Peter Thiel. Within is an awesome 4,000+ word opus on Thiel’s views on technology, investing, education and innovation.

Thiel’s career and successes span almost the entirety of the Internet Age - in 1998 he co-founded PayPal, sold to eBay in 2002 for $1.5 billion.

More impressively, the managers and engineers that Thiel attracted to PayPal went on to become some of the most famous entrepreneurs of our era – including at least seven that went on to build companies valued at more than $1 billion: Tesla and SpaceX (Elon Musk), LinkedIn, (Reid Hoffman), YouTube (Steve Chen, Chad Hurley, and Jawed Karim), Yelp (Jeremy Stoppelman and Russel Simmons), Yammer (David O. Sacks), and the data-mining company Palantir (co-founded by Thiel himself).

This recognition for entrepreneurial talent has also made Thiel one of the greatest investors of all time.

His prescience is of course best highlighted by his most famous investment, when in 2004 he gave the 20-year-old Mark Zuckerberg, a Harvard sophomore at the time who had never held a steady job, $500,000 in exchange for 10.2% of the company then called “Thefacebook.”

That investment has so far netted Thiel more than $1 billion in cash, and is the highest profile of a string of amazingly lucrative stock picks, a list that includes the aforementioned LinkedIn and SpaceX, but also tech high-flyers like Spotify and Airbnb.

While lately Thiel has become somewhat infamous for his controversial views on anti-aging (Sens Institute), Libertarianism (Seasteading Institute), and education (20 under 20), let this not distract from the fact that we can all learn a lot from his astoundingly successful approach to investing, technology and entrepreneurship.

A few of my favorites are:

1. Run With the Right Crowd.  Starting with the PayPal Mafia, with his teaching of a famed Stanford Computer Science course, and his ongoing writing, speaking, and networking in Silicon Valley and beyond, Thiel travels in the rarefied air of next generation technology ideas and technologies. And because of this, he meets great technologists and entrepreneurs and sees deals.  Many are duds of course, but a few are world-beaters like the list above.

2. Think AND Act.  As PayPal, Facebook, LinkedIn, Airbnb and so many others so aptly demonstrate, Thiel “gets” key technology and investing precepts like scalability, switching costs, double feedback loops, customer acquisition costs, minimum viable paid options, lifetime value, and many more.

And he acts on what he thinks – through founding and investing in companies with these concepts inherent to their business models.

3.  Get Lucky. In so many ways, Peter Thiel’s successes are emblematic of the business religion of our technology age: LUCK

Books like Outliers, the Black Swan, Fooled by Randomness, and the Age of the Unthinkable profess on it.  Successful technocratics like the PayPal mafia toast to it.  Aspiring entrepreneurs who seek their name in lights pray to it.

And the average man unwilling to step outside of his box gets none of it.

Peter Thiel, from his earliest days, has stepped out of the box and has thought for himself and challenged others do the same.

He has acted on those thoughts and beliefs through founding and investing in companies that in retrospect might look like easy calls, but at the time were shrouded in considerable doubt and passed over by almost everyone else.

With this way of thinking and doing, Peter Thiel has channeled the Romans and their famous ode to luck - "Fortes Fortuna Adiuvat", "Fortune Favors the Bold."

The question, of course, is will you?

P.S. Looking for Opportunities Now? Each year, Growthink reviews hundreds of emerging company opportunities and selects those with the best management teams, market opportunities, and financial prospects. 

To learn more about opportunities we are following now, Click Here.

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RISK…and what to do about it


 

The four letter word in all conversations between entrepreneurs and investors is risk.

Investors are always interested in getting ownership stakes in high potential companies but are also always weary of the considerable risk-taking necessary to actually do so. 

The most successful investors and entrepreneurs I know take a dispassionate and detached approach. 

They don’t get caught up in all of the “drama” around thinking and talking about risk.

Rather, they view it for what it actually is - simply a measurement of the likelihood of a set of future outcomes.

In the context of evaluating whether or not a business will grow and be successful, risk has three main drivers:

1.  Technology Risk. Can the entrepreneur actually bring-to-market a product or service and on what timeframe?

2.    Market Risk. Once the product is in the market, will anyone care?

3.    Execution Risk. Can that entrepreneur lead and manage a growing enterprise?

Critically, this risk calculation is done not by adding, but rather by multiplying, these factors together.

As such, poor grades on any one of these factor has an exponential impact on the business' overall risk profile, and thus its overall attractiveness.

And as should be obvious, better led and better managed companies simply have better answers when queried regarding the above - their technology plans are better thought out, they understand their market and customers more deeply, and their people have better resumes and track records. 

But it goes deeper than that. 

Human beings – conservative by default - are disproportionately prejudiced against higher risk undertakings and strategies, even when their expected returns more than compensates for their higher risk.

As a result, higher risk deals are normally underpriced while the lower risk ones are usually over-priced. 

That is good knowledge for investors seeking alpha (and who isn’t?), but what about the entrepreneur?

Well, it should be to always remember that the real dialogue going through the mind of an investor when considering a deal is not really about technology, or market, or management, even when that is what they want to talk about…

No, it is almost always about risk - both its reality and its perception.

Address this concern above all others, head-on, thoughtfully, confidently, and candidly. 

And then risk will be put back where it belongs - as a factor to consider - and not something that just automatically stops a deal.

To Your Success,

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Chief Executives and Chief Shareholders: Never the Twain Shall Meet?


 

Small business owners lead the most efficient and effective organizations ever designed by human hands - profit-seeking businesses where the Chief Executive Officer also happens to be the Chief (as in largest) Shareholder, too.

Among many benefits, this business form fully addresses the Agency Problem - so often found in larger companies - where the interests of the professional managers do not always sync and align with those of the shareholders.

This can cause various (and nefarious!) effects like:

•    Managers seeking to maximize their shorter term "cash-out" - high salaries, bonuses and the like -  irrespective of their effect on / benefit to the organization as a whole

•    Managers not pursuing potentially high returns, but also higher risk strategies as the personal benefits to them when successful (i.e. a pat on the back) are far less than the penalties when not (i.e. getting fired)

•    In worst cases, managers committing out-and-out fraud, treating the companies they are entrusted to lead as personal piggy banks (see Enron), with their only strategic calculus being whether or not they will get caught

In contrast, in most circumstances, what is best for the managers of a small business is what is best for its shareholders, as they are normally one and the same.

But there are three scenarios where this is decidedly NOT the case:

1.    When Contemplating Raising Outside Capital. For far too many small business owners, when they think about raising capital, they think too much about "control."

As in "I don't want anyone looking over my shoulder." Or "telling me what to do."

When I hear comments like this, the first thought I usually have is that it might be a very good thing to have someone looking over your shoulder and telling you what to do!
 
Why? Because usually the advice given is in the interest of the businesses’ shareholders…which to reiterate the largest one of these is usually the entrepreneur resisting “control!”

2.    When Contemplating Selling a Business. More often than not owners of businesses capable of attracting a buyer and being sold LOVE what they do, and they especially love being the BOSS.

So the prospect of selling out and no longer being the BOSS can be emotionally difficult.

Now, from the perspective of the Chief Shareholder, the right response to this should be, “Who Cares!”

With the risk of sounding harsh, this decision should be made solely on the strategic and financial merits - lifestyle and heartstrings considerations be darned!

3.    Contemplating Investing More of One’s Own Money in One’s Own Business. When one is lucky enough to have capital to invest, the Chief Shareholder “Hat” needs to be worn far more tightly than the Chief Executive one.

Because as the Chief Executive, it is just too easy to overlook portfolio diversification considerations, as it is not possible to “diversify” from the huge time and energy investments necessary to be an effective CEO of a growing company.

From this perspective, the right decision is to almost always try to invest as much as one possibly can away from and outside of one's own business.

I know, this is extremely hard to do as more often than not every instinct screams out to just pour more time, energy and treasure into it to the exclusion of everything else.

That is the Chief Executive talking and is the kind of “irrational” commitment to success that is at the heart of what makes being a small business and an entrepreneur so intoxicating (and admirable)!

BUT when the three scenarios and opportunities above present themselves, take a pause and listen to Mr. and Ms. Chief Shareholder, too.

If nothing else, your wallet will thank you.

To Your Success,



This post is a based on a thought piece I wrote for Entrepreneur Magazine last year. The original article can be viewed here.

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Today’s B2B: Go Mobile or Go Home


 

How are the best business-to-business (B2B) companies and brands getting past the noise and the online clutter and connecting with their clients and customers?

Well, marketing research firm Motista recently surveyed 3,000 purchasers of 36 B2B brands to find out.

I encourage any executive whose business sells primarily to other businesses to read the full report here. It is chock full of fascinating and very high ROI B2B marketing and sales nuggets.

In it, I found three particularly prescient ideas as to the Mobile Internet Revolution we are all currently living through, and how smart entrepreneurs and investors are playing and winning with it. They are:

1. Mobile, Mobile, Mobile. Mobile browsing, shopping and buying is growing at such a rapid rate that it has become now virtually indistinguishable from the traditional, desktop-driven Internet.

This is obviously having a dramatic impact on not just consumer markets (i.e. tweeting and texting Millennials), but on B2B markets and interactions as well.

Which leads to takeaway number two…

2. Personalization. As well demonstrated by this awesome Grainger ad, even older line industrial companies and brands selling to other old line companies are now connecting their brands and messaging to the personalized needs, wants, fears, and aspirations of individual buyers.

In other words, it is no longer enough to just demonstrate business value (i.e. functional benefits and business outcomes), but personal benefits must be communicated as well.

Things like promotion, popularity, influence, and confidence.

AND do so in a way “that delights, inspires, and surprises…and makes a person want to own it, riff on it, and share with others…”

Yes, this is hard.

But when done right, the rewards can be the kind of word-of-mouth viral campaign effects that to date have only been available to consumer brands and marketing campaigns (see Old Spice, DollarShaveClub).

3. Multiple, Digital Touchpoints. From personalization of message follows multiplication of medium.

With B2B buyers porting their iPhones and Galaxies-trained “always on, at my fingertips” sensibilities to the work place, B2B sales cycles are now increasingly “multi-dimensional.”

These cycles involve not just in-person and on the telephone analog selling, but also multiple digital touchpoints and nudges - texts, tweets, LinkedIn connects, YouTube favorites, Facebook likes, Instragrams, and more.

These are the new rules of the B2B marketing and sales game.

And we either learn to play by them hard and well…

…or we consign ourselves to being left behind in our mobile, so very personalized, sometimes annoying, but also so often delightful and always opportunity-filled world.

To Your Success,

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The Rise of the Machines


 

Last week, I shared three themes percolating in the dynamic Internet of Things (IoT) movement: 1) Wearable Devices driving health and wellness breakthroughs 2) Embedded Sensors “incrementally” improving industrial productivity, and 3) The converging trends of miniaturization, affordability, and “de-wireization” driving energy efficiencies and cost reductions the world over.

These are big themes - breathtaking in their “macro” - but sometimes very difficult to translate to specific opportunities from which we as entrepreneurs and investors can individually benefit.

But try we must, both because of the sin that it is to see an opportunity and to not pursue it, and if we don't

…we run the very real risk of being overrun by transformations so profound and all-encompassing as to threaten to the point of obsolescence virtually every business and investment model.

Overly dramatic? I don't think so.

For if the last 20 years of technology advances have taught us anything, it is that global, online connectedness naturally creates conditions where choosing winning strategies don't just give companies a leg up, but allows them to capture all of the market (including its profits).

Examples of this phenomenon?

Think Google for search, Facebook and LinkedIn for social networking. Twitter for one-to-many communication.

And how about SpaceX for rocket technologies? WhatsApp for free SMS? EBay for online marketplaces? Craigslist for classifieds?

The list goes on and on.

And this coming Internet of Things - with estimates as high as 25 Billion devices being online in some form by 2025 - will provide far greater opportunities for new entrants to rapidly scale and for incumbents to be rudely displaced than your “Father's Internet” ever did.

The revolution here can be boiled down to one word.

Data.

And the need to manage and interpret the vast and ever-streaming treasure trove of it that will always be flowing from these billions of interconnected devices.

I thought General Electric's Head of Software Bill Ruh, explained it best at Kamal Ahmed’s and Ali Tabibian’s IoT event last month. The example he used was of the jet engines that GE makes for Boeing and other aircraft manufacturers that both create and allow for tracking on huge amounts of performance data.

Now when that data confirms the belief of the technicians managing those engines, it is used.

But, when it contradicts long held assumptions and beliefs, more often than not it is ignored.

In an IoT world, this belief system, this hubris, one’s qualitative judgments in contradiction with “the facts” needs to be quickly and ruthlessly discarded.

And it must be replaced by the conviction, faith, and sternly pursued managerial practice that these facts, this data above all else is king.

Sound harsh? Un-feeling?

A foreshadowing of a Rise of the Machines world where we humans are regulated to a feeble processing power second class?

Perhaps.

But the optimists among us see many examples of long-held human prejudices cracking and disintegrating in the face of impersonal yes but also agenda-free data.

And another point – quality data analytics drives efficiency which in business and in life ranks right up there with sound strategy and impeccable ethics as pillars of asset and profitability growth.

When looked at this way, that in an IoT world good data analytics and analysis no matter the business trumps all, what naturally follows is that the particular business that one intends to start, build or invest in is almost secondary.

More important is one's relationship, one's willingness to let the data - well collected, accurate, and regularly and properly analyzed data - guide ones business decisions, strategies and tactics.

This is very hard to do in practice, as old habits and ways of thinking and doing die very hard.

But, as the habit is built, the competitive cost, and positioning advantages - built up incrementally over time in a business’ product and service offerings, in its marketing and sales conversion funnel, in its operational efficiencies - become unassailable.

And then, in the eternal words of the great Charlie Munger - Warren Buffet's investment partner for over 50 years - a business approaches a Low Cost, Hiqh Quality nirvana where assets and profits build steadily and wildly over time.

Hail to the Machines.

To Your Success,

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The Internet of Things


 

I had the good fortune to attend GTK’s and Pillsbury’s amazing Internet of Things Private Executive Event in Palo Alto last week.

It was a star-studded, technocratic affair - drawn from Kamal Ahmed’s and Ali Tabibian’s amazing Silicon Valley network, by the high-profile speakers and panelists including Qualcomm’s chairman Paul Jacobs, General Electric's Head of Software Bill Ruh, Cisco's Vice President Tony Shakib, Splunk CTO Todd Papaiaonnou and by the incredibly exciting and timely topic itself.

Whatever name you want to call it - the Internet of Things (IoT), the Internet of Everything, Machine-to-Machine Computing, the Embedded Internet, Smart Services - the fundamental idea is that we are moving rapidly to a world where online connectedness exists not just on our desktops and smartphones, but rather is woven into the very fabric of our world (cars, planes, factories, our bodies and more).

This coming reality is scary to some for sure, but the myriad of productivity and efficiency gains an IoT world promises is as exciting as business gets.

And so the attendees - from Fortune 500 tech stalwarts like Intuit, Amazon, HP, and Oracle, to high-profile VCs like Andreessen Horowitz and Google Ventures, to some of the hottest IoT start-ups in the world (StreetLine, Jasper Wireless, Liquid Robotics) - listened as the speakers shared both the key IoT tech. advances (miniaturization, affordability, de-wireization) and the corresponding best areas of business opportunity.

My Three Takeaways:

Better Health and Wellness. Any fears of big brother and losses of privacy in an IoT world are well offset by the opportunities to save and prolong lives via inexpensive, unobtrusive, and accurate monitoring of “on the body” health data and events.

We can see the possibilities in the early successes of the quantified self-movement, pioneered by companies like FitBit and Jawbone that monitor sleep, exercise, diet, heart rate, and body temperature, and more.

As technology and the collective data sets naturally grow and improve, the opportunity to intervene quickly (and remotely!) in both catastrophic and chronic health events is incredibly exciting.

The Industrial Internet. General Electric’s Billion Dollar Bet to transform the 122 year old company from one based on building and selling large and complex machines - jet turbines, locomotives, and power plants - into one based on selling analytics and services to ensure that these machines run incrementally ever-more efficiently highlights the promise of the Industrial Internet.

Its decidedly low glamour goal? To apply a form of Moneyball to the gigantic Old Economy backbone of our modern world and “eek out” 1%, 2%, and 3% efficiency gains that in their aggregate represent trillions of dollars of increased productivity and profitability.

Energy. Energy is a HUGE area where converging and coalescing IoT tech advancements are starting to allow for massive reductions in our global carbon footprint while making the energy to power our cars, drive our factories, and light our homes cheaper and more accessible and reliable.

Great for those of us in America, but life-changing for the three billion people around the world without daily access to electricity, heat, clean water, and reliable food.
 
An overly optimistic take? Perhaps.

But even if only 1/10 of the productivity and efficiency promises shared in Palo Alto last week come to pass, IoT represents a business opportunity so large, multi-faceted, and all-encompassing as to make even the most grizzled and cynical market observers more than a little giddy.

And that about sums up my time in Palo Alto last week - a bunch of big, technologically literate kids talking and acting as if we all together are about to enter one of the biggest candy stores in any of our lifetimes.
   
To Your Success,

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Today’s Market: A Bubble Waiting to Burst?


 

The incredible prices paid for high flying technology stocks this past year - whether it be in the form of acquisitions, in the cases of Dropcam, Open Table, WhatsApp, OcculusVR, and Nest, or in the form of financings, in the cases of Uber, Airbnb, Dropbox, has raised the age old questions, worries, and doubts about whether this market and these technology deals constitute a bubble.

And if so, when and how it will burst.

These concerns are mirrored in the recent price run-ups in both the stock and real estate markets.

As detailed last week, since March 2009 the S&P index has almost tripled, while real estate prices are up 10.5% this year and are now approaching their 2007 highs.

So, will it all inevitably come crashing down? Again?

And more importantly - whether it is or isn't a bubble - how can the individual entrepreneur and/or investor profit and win in the current conditions?

Let's take the bubble question first.

By almost any objective standard, paying into the billions of dollars for businesses with little revenues and/or significant operating losses - as is the case with all the companies mentioned above - is absurd.

There are very few plausible scenarios where the cash flow that these companies will be able to generate can any way justify the prices being paid for them now.

It is just hard to see how Nest will ever be able to sell enough thermostats, Occulus enough virtual reality headsets, Uber to take on enough ride shares, Airbnb enough spare bedroom rentals to justify the prices being paid for their businesses.

So, in this context yes, these businesses are wildly over-priced and there is a very good likelihood that the investors in them will experience a painful comeuppance.

This, however, represents a theoretical view of pricing, one driven by the relationship between current and future cash flows.

In the real world however, prices are determined by supply and demand.

And more to the point, by the relative abundance or paucity of Next Best Alternatives.

In this context, these prices make a LOT of sense.

You see, what we have in the world today is a lot of cash chasing a very small number of growth opportunities.

Some of this cash comes from expansionistic Monetary Policies pursued by the Federal Reserve and other Central Banks.
 
And a lot more of it comes from massive commodities-driven wealth in places like Russia, Africa, South America, and the Middle East.

And the owners of all this cash - trillions upon trillions of dollars of it - are naturally seeking to put it to work.

And their options for doing so are far more limited than one might think.

Bank interest rates the world over remain pathetically low.

Political instability, corruption, immature financial systems and securities laws close off private equity-type investments close to home.

So when it comes to true growth opportunities – the kinds driven by technologies that transform industries and markets - businesses like these are extremely unique and relative to the amount of cash out there seeking to be put to work, also in exceedingly short supply.

These global macroeconomic conditions show no sign of abating, so from these perspectives No are not high and the current conditions can and should continue for some time.

So that leads to our second question - how can today's investors and entrepreneurs benefit and win in these markets.

Well, as discussed last week, first of all by cultivating a bullish mindset in line with these strong economic times.

By recognizing the Sucker’s Bet that cash now is and likelihood will remain for the foreseeable future.

By fully embracing that this is not 2009 anymore - that the Great Recession has ended and that we are in the beginning stages of a Technology-Driven Growth Boom with no end in sight.

And to be resolved to grab your piece of it.
   
To Your Success,

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