Reaction: Empire of the Geeks (The Economist)

Article link: http://www.economist.com/news/leaders/21659745-silicon-valley-should-be-celebrated-its-insularity-risks-backlash-empire-geeks

The news focuses on the latest short-term, large impact news, which at the moment is China. While I feel like beating a dead horse, venture capital funding levels should also be a point of interest. The Economist attempted to understand the Valley this weekend, and, for the most part, got it right. The link isn’t to the full article; you’ll need a subscription (which I highly recommend).

Everyone keeps mentioning that, even if there is a bubble, the current environment is different than the 2000 tech bubble. While there are many similarities, I believe this. The key point is that people aren’t quitting their jobs to day trade, and there are far fewer IPOs, which means less general exposure. For example: there were 632 tech IPOs in 1999 and 2000, only 53 in 2014. In addition, many companies are making a conscious decision to remain unprofitable in a bid for growth, something that’s fueled by newer up rounds.

However, a bubble is still a bubble, and we need to recognize that without obvious liquidity options, valuations are likely to fall. Bill Gurley from Benchmark, which has already expressed its concern with valuation in the market, notes “If your competitors are acting like capital is free and doesn’t matter, then you have to live in that world.” And competitors now encompass large mutual fund operators, including Fidelity and T. Rowe, which are leading new rounds at higher valuations (though with participating preferred terms).

Only time will tell how this will end. As quoted in the magazine, “One cynical venture capitalist sees many of the valuations as relying on a ‘squint test’: If by squinting you can convince yourself that a company looks vaguely like one which has already commanded a high price, you should value it as people have the other one.” However, Facebook stayed private for 8 years, with an investment by Microsoft in 2007 for $240m at a valuation of $15b, and now is worth $276b. (Of course, the VC investors at the time will begin to lament immediately about Friendster).

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The Constraints of Too Many Choices

As anyone who knows me will tell you, I have too many tablets. In my bid to lessen the amount of devices in my life (my goal was 2), I ended up buying more than I will ever need. My NYC roommate laughed when I explained to her that buying the Microsoft Surface Pro 2 was supposed to be the last tablet I would buy for some time, and that ended up being wrong.

The truth is that I wanted a device to do everything, that it would be somehow light enough to use as a tablet, powerful enough that it could be used as a desktop, and I wouldn’t be afraid to lose or break it. At this point, it is almost impossible for a device to do all that. Apple certainly comes closest to fitting the bill, but I prefer the Android or Windows OS. And the Windows OS is not very expansive for mobile / tablet use, but the Android is not good for productivity work, especially when I need to work remotely.

This long intro leads to why I like the Fire OS despite its limitations. In work and life, it becomes very hard to figure out what is necessary and what is “nice to have.” I always collect things and apps for the specific instances when they could be used, and by the end I end up purging my cache because of space constraints. The Fire OS forced me to really think about what I need, what I use on a daily basis, and, most importantly, what I can live without. Thinking about it, it’s the same with work; being able to focus on the key items and not worrying about completing everything. Perfection is certainly something to strive for, and hopefully achieve, but people confuse “perfectionists” for “completionists.” Like an impressionist painting, enough is done to give the viewer a clear idea of what is being portrayed.

My feelings may change as I keep using the Kindle HD 7, but at least it puts in perspective what needs to be done, rather than what would be nice to have done.

Quick Reaction: GE Earnings for 2Q15; Software Is the Next Big News?

News Update: http://seekingalpha.com/news/2635435-general-electric-posts-strong-industrial-performance-ups-forecast

As I was half awake and somewhat listening to CNBC, GE’s earnings were being reported, with the company beating estimates in terms of profits as well as GE Capital being sold contributing to the boost pre-market. However, as they kept discussing the company, the analyst they brought on started to talk about the “predictive analytics” that GE provides for its clients, and how software is now the big thing at GE. Other industrial companies that apparently also have predict analytics being implemented include Rockwell and Honeywell.

Technology has always been the easy catalyst to use to become excited about companies. I was pretty young during the tech bubble in 2000, but I was aware that a lot of businesses were trying to reposition themselves so that they were on the cutting edge of technology. In these last few years, “cutting edge” is business intelligence, software that can take data a company (or an industry) generates, and suggest strategic moves, such as level of spending, sectors to focus on, etc. Any talk about any company being able to create predictive software implies either one of two things to me: 1) they have a crude software in place that takes historical data and regurgitates it to the customer (“Hey! In last March you ordered X amount. We think you should order X*1.05 this March.”), or 2) they’re trying to build something customized, cobbled together by other companies (i.e. see Fire OS for Amazon, it’s just an Android machine).

This might not just be talk, however. GE is probably in place to take advantage of analyzing a lot of data. On the industrial side: supply chain management software is fairly established technology these days, and GE will have proprietary data to put in the system. Consumer technology (like washing machines): the Internet of Things concept continues to grow, and it wouldn’t be surprising to see consumer products outfitted to send and receive data over the IoT.

Technology has always been a great way to make a big splash, but without proper understanding of what the offering intends to do and what it can do now (and also how), any talk about innovative software scares me rather than excites me.

Quick Reaction – A Closer Look At The Silicon Valley Vs. Wall Street Talent War

Article: http://techcrunch.com/2015/06/25/a-closer-look-at-the-silicon-valley-vs-wall-street-talent-war/

I remember, in the 2000s, the top industry destination was unabashedly finance. In some ways, this is a bad thing. Finance is a derivative of the overall economy and political environment; the value of stocks, bonds, vehicles, etc. are derived from a real life project, like a company or a toll bridge. Top minds will always endeavor to create, and thus was born mortgage backed securities, new derivatives, active ETFs, and so on. But I always thought that the smartest and brightest were better off creating tangible new products or services.

In that sense, technology has always been an area that attracted young and active minds. And with the emphasis less on the hardware and cables (as it was back in 2000) and more on software, companies are born over conversations and can have a real impact on the world, as Eric Poirier writes in his Techcrunch contributions (he’s CEO of an investment management software company named Addepar).

However, this is where I stop agreeing with Eric. He believes that the speed of industry change and social impact drives new graduates to flock to the technology world. As cynical as it sounds, the third factor is: MONEY. I don’t mean to sound pessimistic about the human race, or question the intentions of the entrepreneurs. In fact, I’m glad that a portion of the motivation is money; it means that they want to be properly compensated for their ideas and their efforts. In a way, money is a great way for society to reaffirm a new startup’s vision, saying “yes, we support that.” More often than not, money is the third motivator (below social impact and speed of change), and it can help keep a gifted entrepreneur on task and not self-deluded.

It’s important to emphasize that money is a contributing factor because Eric makes broad implications about the finance industry having to keep up with the tech world. His argument for banks are changing the way they do business is because “the future leaders of finance have been weaned during the Information Age… if a design is bulky and inefficient, it’s time to blow it up and develop something simpler.” What drives an established, huge financial behemoth like a bank is profits. Exchanges are moving to automated trading from floor trading because of cost and reach. Banks are creating automated branches because maintaining a staff and real estate is expensive. And traditional financial institutions investing in startups for a good return is just that, they’re investing in startups for a good return rather than making a commentary about the business model. Financial institutions don’t make changes because a design is not pretty, they make changes to make more money.

Eric is right about how the technology world is pushing the financial world to change faster. Technology is not only improving the quality and speed of financial services, but even filling the spaces finance firms have left behind, such as lending to small businesses. But the financial world is concerned with the bottom line; the tech world is filled with startups who are focused on the above top line growth (like bookings). Viewing the financial world through rose-colored lens is a grave mistake.

US Technology Fund – What’s Going On? – Quick Reaction

Link to the A16z presentation: http://www.slideshare.net/a16z/state-of-49390473

The big question in Silicon Valley: are we in a bubble? A16z says no, and produced a 53 page presentation with relevant data to show that 2014 investments are nowhere near the levels of 2000. I believe that we’re in a smaller bubble that can be managed, but we need to vigilant on what kind of money is flowing into the startup market.

There are a few nitpicks I’d like to make about the presentation that stems from my view of the market.

The first one comes from using VC fundraising as a sign of a tech bubble. It would make sense to look at if you assume that only VC funds provide a meaningful funding for “startups.” Shadow capital has played a bigger role in direct investments. For example, in the later rounds, we see Fidelity, GS Merchant Bank, and sovereign funds leading the series, usually raising somewhere in the vicinity of +$50m. Investors that attempt to diversify their funds may find that they’re overallocated in venture capital. In addition, VC funds remained focused on targeting irregular returns and focus on the earlier rounds (despite the inevitable waterfall structure), so VC fundraising is determined more by the number of new startups rather than actual capital in the entire startup space.

The second discusses the “tech returns,” and how tech returns that used to be in public markets have now shifted to private. But the companies used as an example, specifically Twitter, didn’t provide a dividend recap or get acquired. In fact, the only monetizing event for each example comes from an IPO. I understand the idea: value creation came while the company remained private. But investors can’t live off implied valuation based on the new rounds, and at some point will need to see cash come out. There have now been IPOs where the company’s TEV is lower than the implied TEV post-latest round. Now, thankfully, Hortonworks’ valuation has gone up to its original implied private valuation, but investors now see this as a potential risk.

Long story long, we need to realize that startups are remaining private for a number of reasons, but the most important reason is because they can [remain well-capitalized while staying private]. Private companies don’t face the same scrutiny public companies do, whether it’s from SEC regulators or agitated shareholders, and valuations are based off the latest round while not taking into account any of the terms (preferences, priority, etc.). I hope it’ll be a soft landing, but we need to realize that we are in a manageable bubble, and denying it will only lead to a large pop at the end.

Book Review: Onward (How Starbucks Fought for Its Life Without Losing Its Soul)

When I was reading this book, I couldn’t help but remember what my strategy professor taught us about “core competencies.” Seeing how technology has evolved competition, it seems easier to say that the idea of a core competency is an outdated one. Companies that come to mind are Microsoft, Caesars, and Burger King. These were companies that enjoyed, at some point, being kings of their industries (I might be stretching it with Burger King, ironically), and are now trying to play catch up with their more savvy competitors.

Onward is a stream of consciousness from a ceo (purposely not capitalized) of one of the most successful companies in America. Starbucks had somehow grown rapidly without collapsing on itself, and was able to reposition its business when growth was no longer was possible. The company brought an aspect of life from Europe that the U.S. didn’t have; a place to spend either 2 minutes or 2 hours of your day. It was able to make mistakes and recognize successes, ultimately crafting the company it is today.

What I found interesting was how Howard Schultz evolved his managerial abilities as the company grew from 14 stores to the behemoth it is today, and yet still take a very hands-on approach. When Howard became an non-executive chairman, you could feel his nervous energy of being left out of operations as Starbucks became increasingly focused on store growth rather than the services or products, leading to its greatest stock performance as well as its major decline. If entrepreneurs were looking for a way to see how they can take a step back and manage their business that way, they would be sorely disappointed by this book. But perhaps there is a lesson here: Howard recognized when he needed to step in again to take the reins rather than hope for the best. Though he tried to hire the best, he soon realized that it was more important to hire those who understood and shared his vision of the business. For better or for worse, the company would succeed or fail due to his vision rather than listening to what the “smart” thing to do.

Another interesting point (and only interesting to me, since I’m in finance) is the shots Howard takes at Wall Street. Research reports produced by analysts give an indication of how the Street overall feels about companies, and stock prices rise and fall due to Wall Street ratings. It is, of course, natural that the ceo of a business feel that Wall Street doesn’t really understand its business. As a business is going through its trials and tribulations, equity reports seem to exaggerate a company’s failings. But it’s unfair to blame the Street while the stock price is falling, and then reference analysts’ comments as the company turns around. You can’t have it both ways. Either see these analysts commentary as a report card, or ignore it completely; the stock price will do what it does regardless (look at Microstrategy, they don’t even do analyst calls).

There is a bit of self-grandiose praise, though it is deserved. In a way, the book reads like a typical summer flick: the protagonist always faces what seem to be insurmountable odds and somehow overcomes them, only to find more challenges ahead. But this is real life, a company that manages an extremely complicated marriage of product, service, and supply chain management. From my personal experience, I remember when I thought Starbucks smelled terrible; it’s referenced in the book as the way cheese melted improperly in the early ovens when food was first introduced. I was impressed by how I could relate to the challenges a Starbucks store faced with me as a consumer, and appreciated the huge machinery that I don’t see in the background. Most importantly, the book show that enthusiasm has a place in the corporate world; it takes time for people to understand the message and even longer to have people accept it, but success is possible as long as you keep your head.

(Semi) Book Review: China’s Second Continent

Link: http://www.amazon.com/Chinas-Second-Continent-Migrants-Building/dp/0307946657/ref=sr_1_1?ie=UTF8&qid=1426101007&sr=8-1&keywords=china%27s+second+continent

Normally, I finish a book before I write a review, but with an hour left (according to my Kindle) and the digital library book overdue by a few weeks now, I’m obliged to write my thoughts and impressions down, which I already formed from the first few minutes of reading.

Let me begin by saying that this book isn’t. This isn’t a book dissecting China’s overall policy in Africa, nor is it a book measuring the Chinese migration effect. This is a collection of stories from each of the million migrants, and how they managed to survive and, perhaps, even thrive in what is probably the final frontier on Earth. And this is the point that Howard French, a tireless journalist, is trying to make: policy might be made by governments, but individuals are the catalysts for change, no matter how fast or slow it might be.

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