Sunday, October 27, 2013

Crowd Funding: As the Market Evolves

Last week, the U.S. Securities and Exchange Commission (SEC) unanimously voted on proposed rules allowing a broader set of investors to buy equity in small private companies through crowd funding exchanges. SEC Chairman Mary Jo White said, "There is a great deal of excitement in the marketplace about the crowd funding exemption" and “we want this market to thrive, in a safe manner for investors." NOTE: The process of finalizing the SEC’s rules may take until the summer of 2014.

While interest in crowd funding has grown significantly in recent years, regulatory restrictions have limited many small businesses to promoting and selling products, services and events that were still in development. In this process, the crowd funding exchanges provide a forum for small business to present videos and business plans about themselves and their efforts in the hope of connecting with new customers and investors.

Prominent Crowd funding exchanges include Kickstarter, Indiegogo and Fundable; with market leader Kickstarter raising $844 million for 50,623 projects since it started in 2009. In addition, while some technology and video game projects have raised over $1 million, the overall funding success rate is 43.9% for projects promoted on Kickstarter, with the highest success rates in the areas of music, theater and dance.

The SEC’s changes should permit small companies to sell equity stakes to non-accredited investors with less than $100,000 of annual net. Companies using crowd funding exchanges to sell equity will be limited to raising $1 million in funds every 12 months.

MY TAKE
  • Historically, funding for startup businesses came from friends and family, angel investors and venture capital firms - that may provide business guidance and connections. The SEC’s proposed rules could significantly expand the funding sources for these businesses.
  • While the SEC’s changes may increase the flow of “dumb money” into the market, it is unlikely that crowd funding’s “dumb money” track record will differ from other investment markets.
  • Finally, while funding sources may increase, crowd funding is not a short cut to business success – which still requires a lot of planning and execution.

Sunday, October 20, 2013

Views on Apple, Google and IBM

With a budget disaster averted by the U.S. Congress last week, investors increased their focus on the actions and performance of various companies. The following are selected views from the technology sector.
  • Apple, Inc. announced that Angela Ahrendts, formerly CEO of luxury retailer Burberry, is joining the senior management team to reshape its physical and online stores. Apple’s CEO Tim Cook said, “I have wanted one person to lead both of these teams for some time because I believe it will better serve our customers, but I had never met anyone whom I felt confident could lead both until I met Angela.” Ms. Ahrendts, during a 2010 Wall Street Journal interview said, "If I look to any company as a model, it's Apple…they're a brilliant design company working to create a lifestyle, and that's the way I see us."
  • When Google reported better than expected quarterly results, its stock hit an all-time high of $1015 driven by signs that its efforts in mobile advertising are gaining traction. Google CEO Larry Page said, “We are closing in on our goal of a beautiful, simple, and intuitive experience regardless of your device”. He also said “about two years ago, when I became CEO again, my goal was to make sure Google maintains the passion and soul of a startup as we grow,” and “Great is just never good enough.”
  • IBM Corp. had a sixth consecutive quarter of declining revenue. Software sales increased 1%, services revenue declined 3% and hardware sales fell 17%. As investors sought growth from cloud computing, mobile services, “big data” analytics and data security, CEO Virginia Rometty said, “[we] fell short on revenue”, “'we clearly need to do better” and "ours is a pay for performance culture and we must all be committed to taking action to address our performance gaps."

MY TAKE
  • Regarding Apple – While Steve Jobs was inspirational; CEO Cook is a hard-core operations person. Hopefully Ms. Ahrendth can increase the cool factor as the firm seeks to increase its presence in Asia and other regions and compete with Google and others. Investor are focusing on this week’s product announcements.
  • Regarding Google – As a technology leader, momentum begets momentum. Investors will need to track weakening per-click revenue trends.
  • Regarding IBM – This is another firm with a relatively new CEO confronting management transition challenges. It is likely that additional staffing changes will be required to get the firm back on track.

Sunday, October 13, 2013

Assessing Global Skills: An OECD Report on Adult Literacy and Problem-solving Skills

The Paris based think tank Organization for Economic Co-operation and Development (OECD) released a report on adult literacy and problem-solving skills based on surveying about 166,000 adults aged 16-65 in 24 countries. Adults with low literacy skills are 1) twice as likely to be unemployed, 2) likely to have poor health, 3) believe they have little impact on political process and 3) less likely to trust others. In addition, communities with large proportions of adults that have limited literacy skills face challenges when introducing productivity-improving technologies.

Top performing countries were Finland and Japan, while Italy and Spain where the worst. The New York Times highlighted that ”the skill level of the American labor force is not merely slipping in comparison to that of its peers around the world… it has fallen dangerously behind” with younger U.S. students having far fewer skills than adults ages 50 to 65.  The following video is an overview of the report.


MY TAKE

Given the report’s 461-page length, there is much data to analyze and interpret. However, declining skills in countries such as the U.S. should be a wake-up call to policy makers, educators and business leaders.

Influencing a Government Shutdown

After several days of a partial U.S. Federal government shutdown, political leaders suggested that progress was made in their budget negotiations and that Obamacare was less of an issue in the process. Notably, the improved tone occurred after the October 9 release of a letter from Koch Industries to selected members of Congress stating that “Koch believes that Obamacare will increase deficits, lead to an overall lowering of the standard of health care in America, and raise taxes. However, Koch has not taken a position on the legislative tactic of tying the continuing resolution to defunding Obamacare nor have we lobbied on legislative provisions defunding Obamacare.”

MY TAKE

The swift reversal in the political tone after the release of the Koch letter is another indication of the influence the Koch brothers and other wealthy powerbrokers have on the U.S. political process. While some uncertainty has been removed in the budget/debt ceiling negotiations, recent actions could simply be more “can kicking”. Market volatility may continue as the October 17 budget deadline approaches.

Sunday, October 6, 2013

A Shutdown, a Showdown and Global Transitions

After the U.S. Congress failed to pass a budget, many “non-essential” government services were shut down.  A core issue tied to the budget showdown is the Affordable Care Act (aka Obamacare) which was passed by Congress during 2010 and ruled constitutional by the U.S. Supreme Court on June 28, 2012.
  • President Obama said "I'm happy to have negotiations… but we can't do it with a gun held to the head of the American people”
  • Congressman John Boehner said “when we have a crisis like we're in the middle of this week, the American people expect their leaders to sit down and try to resolve their differences."
(Note: There have been 17 Federal government shutdowns since 1976. The most recent, during 1995-96, lasted 28 days.)

Separately, Managing Director Christine Lagarde of the International Monetary Fund (IMF) said, during a presentation at George Washington University,”Five years ago, the global economy avoided a second Great Depression. Five years on, the journey is not yet complete, but the fog of crisis is lifting—and we can see that its aftermath leaves us with multiple new transitions….Two in particular stand out: a transition in the patterns of economic growth, and a transition toward a different kind of financial sector. In each of the two major transitions…the international community faces a common challenge: to make sure that all can gain from globalization and prosper in our increasingly interconnected world….The global financial crisis has shaken the faith of many in the virtues of being open and engaged with the world. Managing these transitions well is the best way to demonstrate the benefits of interconnectedness—through trade, well-regulated finance, and more equitable growth.”

 MY TAKE
  • Regarding the U.S. shutdown – While pundits suggest that shutdowns are a part of the political process, the economy remains fragile, political polarization is high and satisfaction with Congress is low. As some power brokers may seek to “break the back” of the Federal Government, such a process would trigger significant collateral damage. Hopefully, a resolution occurs before the U.S. hits its debt limit on October 17.
  • Regarding Christine Lagarde’s comments – as she seeks a more moderate role for the IMF, her presentation highlights that economic recovery will be accompanied by challenges and uncertainty. An example is the U.S. canceling trips to trade talks with the European Union and Asian nations as a result of the government shutdown.