Teams to Attract Investors


A few days ago, a growing VC firm was pitching for additional capital from limited partners, where I was part of the audience.  In demonstrating the criteria for early-stage companies they invest in, and they emphasized this characteristic, the “team” is a major factor in determining a target. Details were not broached.  Nonetheless, I have observed the following qualities to consider within a startup team that can attract investors.

First, do the senior team members have direct experience with their marketing strategy?  Let me demonstrate the opposite example.  At a Palo Alto pitch, a Canadian team sought millions to expand internet services at remote geographic locations where the Canadian Telecom carrier did not service. I asked them a simple question: what was their prior entrepreneurial or business experience? Answer: founding and running grocery store chains!

Unfortunately for that team, I have had considerable experience in telecom infrastructure – from fiber optics to satellite dishes. And that experience has taught me that building any network warrants an experienced, telecom team, that is familiar with the engineering requirements and costs to build that infrastructure. A simple bi-directional satellite dish operation costs about $200k. Fiber optic deployment can cost $1 million a mile in Paris, but should be less — although material — in Canada.  Then there are the legal administrative headaches to obtain rights of way, tower permissions, etc.  Ask yourself, why does Verizon employ thousands of lawyers?  Then, I concluded easily that this was the wrong team.  Any money would go down the drain with this project.

Are there other ways to handle this experience problem?  Yes.  One approach is to hire senior operational executives who have that substantive experience. As an example, the Global Crossing founder, Gary Winnick, had zero experience in the submarine cable business. He worked with Mike Milken on Wall Street bonds. With a million-dollar signup fee as a carrot, he hired the former head of AT&T submarine as COO. And that worked.  The cable company raised millions, went public.

How about the opposite  – a team with no experience in the field that still raises money? That is a recipe for disaster. The best, recent example is the Theranos (Silicon Valley) fiasco.  Yes—Elizabeth Holmes raised plus $700 million for her hematology devices and she was even profiled in business trade magazines (  The strangest thing, clearly underscored by a major WSJ article, was that the senior members, including board members, had zero experience in healthcare. Guess what? Now this company —  after FDA revelations — is worthless.  That is the cost of not having the right senior team members!  Investors clearly learned from that poorly placed investment.

The second characteristic to look for in a team is the depth and breadth of management experience in the sector. Somehow or another, Silicon Valley believes that programmers are magicians who can write code, start a company, and manage it as well. Since the age of 14, I have met many programmers, and I don’t recall that their major interest, beyond looking at a computer screen, was to manage a company with all the subtle business issues faced every day – from financial to legal. If that were so, many would have attended business school. Yet, that seems to be the misleading perception in Northern California. Take a young programmer, place that person in charge of an operating tech company, and see what happens: Merissa Mayer lost over $1.5 billion for Yahoo.  Every decision she made definitely damaged the company.  She influenced the Yahoo Board members to keep her in charge, hired incompetent senior managers who were faithful to her.  She still was compensated with plus $200 million in salary and options, after Verizon acquired Yahoo.  And in spite of the extensive cybersecurity breach. I guess that Silicon Valley never penalizes technical people for incompetence.  But Wall Street does.  When she was considered as an Uber potential CEO, I was ready to short the stock.

One other quality I also noted in evaluating teams is the academic school attended. A quick review of the histograms reveal what teams raised capital and what schools they attended, there is no dispute as to the heavily weighed schools run from the top tiered Stanford U. to MIT. Given that there are over 2,500 colleges and universities, there is no doubt as to what attracts investors – less than 1% of the colleges and universities. I also suggest that startups look at the General Partners and what universities they attended.

And is there an interesting solution for this problem?  I once worked for a crafty and conniving CEO who needed to attract investors quickly for his constantly cash-short telecom company. He knew well that academic impressions mattered to investors. He discovered an unemployed Harvard grad desperately seeking any job in any industry.  His prior experience was financial. The strange thing was that he had zero experience in telecom, but that fault or defect did not concern the CEO or the investors.  In fact, during a due diligence meeting, I heard the investment analyst asking the Harvard grad why he left his major, publicly traded company (without admitting his involuntary departure) for this telecom startup – suggesting that this startup company was very valuable.  So, the Ivy League credential had a favorable impact on investors, even though it was a crappy company. Schools do matter.

So, in summary, what defines a stellar team to attract investors?  Subject matter expertise, management experience, and academics.

Posted in co-founder, Management and Capital, Strategy | Leave a comment

Keys to Effective Powerpoint Presentations to Potential Investors

Woman Presenting

Last week, I observed various presentations to raise funding for software technologies to genome-data analytics.  Virtually all failed to deliver an effective message to attract experienced investors.  Ever since I.T. companies developed software applications that can facilitate putting together powerpoint presentations easily, anyone can stitch a slide presentation in a few days.  Yet many fail to deliver their message effectively since the slides don’t follow the key ingredients to an effective presentation.

Let’s take an extreme example on how precise and key are the design of the slides prepared by major investment or publicly traded companies. A former Wall Street investment banker related to me that her former employer, Blackrock, one of the world’s largest fund, required that she only concerned herself with the color of the background for the slides.  With hundreds of millions at stake, any error or defects on any slide could be a costly proposition, including the right shade of blue. I, myself, have witnessed many presentations from publicly traded company CEOs, who had to persuade institutional investors who had direct impact on the valuations of their stocks. They were well prepared with simple, great graphics, with legible and direct bullet points, and to the point. All were svelte and precise. Maybe neophyte presenters should take heed on how to put together such slide presentations that follow the same guidelines from publicly traded companies. Not doing so will not attract the attention from investors.

I need to highlight the major errors in the slides to young companies or startups. The most common error I noticed was a simple message – what does the company do? Some commentators prefer to ask what problem is being solved, but I prefer just to tell me what you are. And that should be done within the first 2 slides. Although a little wordy, I use as an example the first paragraph from S-1 registrations constructed by the company’s management team, its lawyers, and accountants that serve the same purpose.  Since these introductions influence the investments for millions, they must be carefully crafted:

Big Data Software: “Cloudera empowers organizations to become data‑driven enterprises in the newly hyperconnected world. We have developed the leading modern platform for data management, machine learning and advanced analytics. We have achieved this position through extensive collaboration with the global open source community, continuous innovation in data management technologies and by leveraging the latest advances in infrastructure including the public cloud for “big data” applications. Our pioneering hybrid open source software (HOSS) model incorporates the best of open source with our robust proprietary software to form an enterprise‑grade platform. This platform delivers an integrated suite of capabilities for data management, machine learning and advanced analytics, affording customers an agile, scalable and cost-effective solution for transforming their businesses. Our platform enables organizations to use vast amounts of data from a variety of sources, including the Internet of Things (IoT), to better serve and market to their customers, design connected products and services and reduce risk through greater insight from data. A vibrant ecosystem has developed around our platform, and a growing range of applications is being built on it. We believe that our solution is the most widely adopted big data platform.” (Cloudera S1)

Content: “Snap Inc. is a camera company. We believe that reinventing the camera represents our greatest opportunity to improve the way that people live and communicate. Our products empower people to express themselves, live in the moment, learn about the world, and have fun together.  In the way that the flashing cursor became the starting point for most products on desktop computers, we believe that the camera screen will be the starting point for most products on smartphones. This is because images created by smartphone cameras contain more context and richer information than other forms of input like text entered on a keyboard. This means that we are willing to take risks in an attempt to create innovative and different camera products that are better able to reflect and improve our life experiences.” (Snapchat S1)

OTT Hardware: “We pioneered streaming to the TV. Roku connects users to the streaming content they love, enables content publishers to build and monetize large audiences, and provides advertisers with unique capabilities to engage consumers. We do this at scale today. As of June 30, 2017, we had 15.1 million active accounts. By comparison, the fourth largest multichannel video programming video distributor in the United States had approximately 13.3 million subscribers as of June 30, 2017. Our users streamed more than 6.7 billion hours on the Roku platform in the six months ended June 30, 2017, 62% growth from the six months ended June 30, 2016. TV streaming’s disruptive content distribution model is shifting billions of dollars of economic value. Roku is capitalizing on this large economic opportunity as a leading TV streaming platform for users, content publishers and advertisers.” (Roku S1)

Note how carefully the company is described precisely in a few sentences. These sentences can be further summarized into bullet points and simple graphics.  Nonetheless, each punctuation and word need to be sparse and direct in each introduction.

The second common error is too many words or too many graphics on a single slide.  In the many powerpoints from publicly traded companies, I noted the large typeface, simple messages.  Why?  There are hundreds of analysts in the audience.  Any message can be distilled with carefully chosen words. And, if a multi-billion dollar company can achieve that, I cannot see why any startup cannot deliver the same message with the same spartan style.  Just last week, I saw a startup presentation from the founder of a company in the same space as Betterworks – an HR company.  Problem?  Too much information on each slide.  By the time the presentation was completed, I had no idea about the specific strategy that startup would be implementing to differentiate itself from Betterworks.

The third common error I noted is presenting the most fundamental points addressed by the 5-Ts and strategic outline described in my earlier blogs.  Every major information from the Team to Financials should be addressed in the slides.  That information is key to persuade the investor to be interested in the company, who needs to know the essential elements of the company.  And, if during the presentation any section is left out, the startup will fail to attract any investment. Again, a bunch of startup presentations never showed me any financials last week or how its strategy outperformed competitors.

And one must hit the most fundamental points in a ten minute to a 55-minute pitch.  This point is mandatory. I myself got interrupted with various questions during a pitch.  I still look at my watch and make sure I get to state the fundamentals.  In other pitches, I noticed that even one member of the audience would make comments, sometimes not germane, but I never let that deter the completion of the presentation.  To achieve that, one makes sure one has practiced for a 20-minute window, even in a one-hour time frame.

Again, the presentation is the best selling point for the company to show to potential investors why it is an attractive investment. Not placing enough focus on the quality of that presentation will be costly.

Posted in competition, Presentations, Strategy | Leave a comment

OPM – Other People’s Money


Other People’s Money (“OPM”) was the movie title about a fictional Wall Street raider, using capital from others to benefit financially. Why am I skeptical about the new fund-raising techniques revolving on virtual currencies from bitcoins to ICOs?  Or even investment funds that focus on tech companies, yet extolling some peculiar strategies to monetization from investments. Simply because of my personal experience of what a tech founder did within a NYC startup in which I was a senior executive and he successfully OPM’d to the distress of investors.

When I read about recent WSJ articles highlighting the aggressive, business behaviors of young executives like Martin Shkreli or Travis Talanick , as the personality traits of rebels/entrepreneurs, I see something else: good old-fashioned, personal financial greed.  Over a year ago, I read about a controversial San Francisco tech startup whose founder purchased a Ferrari immediately after raising millions of dollars for his startup that had yet to develop a product and had no cash flow. Now, in contrast, I have witnessed well-managed tech companies, but I have seen numerous others where I question the motivations for their existence and which practice obvious financial mismanagement for personal gain wi9th the classic OPM strategy.

Years ago, I worked in a telecom startup led by a “revolutionary” tech founder.  Like any startup, it operated in a large empty loft space in Lower Manhattan.  It had the hallmarks of a startup – young, enthusiastic team, many angles to reach its sales.  The founder also expected everyone to take a large cut in average pay with stock options to come (which he awarded only a fraction as promised.) The company claimed to implement a proprietary telecom technology and be the first in the marketplace. The founder also advertised to be a visionary entrepreneur.  Those 2 years as counsel told me so much about the startup world and how financing works.  And has made me circumspect and suspicious of any startup financial claim.

Within 2 months, I discovered that the company had 299 other competitors nationwide in same space. The founder had questionable expertise in telecom. The founder’s first entrepreneurship had nothing to do with telecom, just real estate.  He attracted other investors from his birthplace, Argentina, to invest in office real estate in New York.  (3 years later those same Argentine investors sued him in the federal courts for embezzlement and fraud.) Of course, New York real estate is never a bad investment.  So, how did he fail? But even that avenue seemed to be not enough cash for this entrepreneur.  He also, during his telecom and biotech dabbling, kept selling real estate as far south as Florida’s Fisher Island.  As my office was next to his, I would overhear his telephonic conversations attempting to sell Florida real estate.  He never seemed to be discussing the day to day operations of the telecom company.  Just his other strategies to reach his net worth for millions.

Soon after real estate venture beginnings, he joined forces with a medical researcher with a putative cure for AIDs.  Although NIH, under Dr. Fauci – the World’s expert, never had acknowledged the existence of this miracle cure, the founder was able to raise funding through the Canadian public securities markets.

The telecom company, a Colorado corporation, was funded through a loan by the founder for $250k, and shared ownership between himself and his father in law. (The in-law was critical in selling his shares to third parties whenever a notable investor closed.) That loan was paid back after being funded by a couple of investors within a year.  Yet, the company burnt through so much cash that the company needed constant monthly funding during my tenure. There were times that the company could not cover salaries the next month. In the meantime, the founder paid himself $500k, traveled extensively under the corporate tab, and had the company pay for the rental of an expensive townhouse.  Even adding more to the cash burning, he had the company pay for his 2 nannies as salaried employees. (Under IRS rules, that would be treated as income to the founder.) And, he bragged about not paying federal income taxes as he considered himself to be a citizen of the world, not of the U.S.  (To own any substantive equity in a registered, telecom company, the majority shareholder must be a U.S. citizen!)

Another substantive cash flow problem stemmed from the product pricing. The company burnt so much cash that it was profiled in Fortune magazine, as a symptom of too much froth in investments. Sales did grow dramatically, but that was fueled by a pricing that was far below its transmission costs, outdistancing the competitors.  In other words, the faster it grew, the sooner it burned through cash.  Profitability was not the focus.  Investors just witnessed customer growth.

In spite of these observable defects, the company was able to go public.  2 years later and $2+ billion in debt and equity funding, it never reached profitability and filed for bankruptcy. Another way of saying it, investors lost over $2 billion. The remnants of this company were sold for $25 million. Meanwhile, the telecom founder used this “successful” company to fund other companies, some even funded, in part, by Google, and hit the same stone wall of lack of profitability. Zebras don’t change their stripes and never will with this founder. Recently, he has OPM’d a biotech company dealing with frozen human eggs.   From real estate to AIDs, to telecom, to Internet, and now, to commercialization of “frozen” eggs. Somehow or another, he presents himself to be a visionary genius in many disciplines, something I find hard to swallow.

OPM is a fairly common strategy for these companies.  Bernie Madoff, one of the worst, leeched billions. Common stock was the only currency for OPM.  Today I see alternative funding mechanisms — ICOs and bitcoins —  new approaches to OPM fundraising.  Blue Sky laws and SEC were promulgated to protect individuals and institutions from fraud and misrepresentation. It only works when the individuals are caught. Nonetheless, the subject matter of my experience has never been indicted, and that suggests that only a fraction of these vapor company founders get caught. Interestingly, I have observed the identical strategies by founders in similar companies like Theranos where someone with not even a college degree claims to know more about hematology than medical experts with decades of experience and that company raised over $740 million and was even valued at $9 bill.  When the FDA proved ineffectiveness of its science, it is now worthless. Just recently, I observed software engineers forming an investment fund without one iota of Wall Street experience. The fund manager gets a management six-digit fee for OPM management, regardless of his performance. So, there are many variations to the same practice. Caveat emptor.


Posted in Capital and Management, co-founder, Entrepreneurship, Management and Capital, Strategy | Leave a comment

Profitable Internet Business Models


Once, San Francisco was the home of a startup that, well-funded initially, employed a bunch of engineers to realize designs of products submitted on-line.  Besides the ubiquitous, well-designed website, it staffed itself with an army of personnel to realize its plan. A couple of years later, it shut down without much fanfare.  When the founder was asked about why this startup failed in comparison to other website startups, albeit successful, that simply hooked up the engineers with designers, he made a memorable reply: “that is only a website!”  A true and succinct observation of what kind of Internet business models truly prosper in Silicon Valley.

Let’s pick the current juggernaut, Uber.  It is a ecommerce “website” that processes credit cards and other payment options (e.g. Paypal) from clients and pays them the balance, after taking about 20% (Wow!) fees for every dollar charged.  This basic, successful Internet transportation model becomes a virtual, ecommerce conduit between guests and hosts on a website and process payments. There is some programming: simple data processing that calculates arrival time by taking distance between two points, divided by average speed.  No complicated algorithms.  We know that Uber’s geolocation services are generated from its API with the cellphone companies – freeing it from building radio towers and satellite services and hiring countless of engineers to manage the infrastructure. We also know that its mapping system is a license from Google or other geographic mapping system.  Everything is digital, its API with the telephones carriers is free, and the website skims a cut to facilitate information between users and the drivers by the design and management of a functioning ecommerce website.  In simple terms, that is Uber. Not a technological marvel.

Another ecommerce model relies on the peer-to-peer model, in this case, for content creation.  The more content created, the more eyeballs are looking at the websites.  In the case of Yelp, we observed that peer-to-peer reviewers added content without Yelp paying not one dime to peer-to-peer contributors.  In many cases the advertised businesses pay a small fee to be inserted in the website’s database. Had Yelp followed the traditional example of employing experienced and knowledgeable critics, much like cuisine or travel magazines, then Yelp would not be anywhere as successful as an ecommerce website.  Yelp is a simple ecommerce model that becomes an oft visited site for people to view services assisted with the free geolocation information from telecommunication carriers. Yelp becomes today’s substitute for the Yellow Pages (for the younger generation, telco carriers once published a fat book listing businesses by services with ads, addresses and phone numbers), articles authored by restaurant critics, and the GPS.

When did this peer-to-peer contribution model being managed by a website begin? Youtube comes to mind. Users uploaded digital videos, of whatever quality, unto a simple ecommerce website.  Videos would be stored in a data center, which, in today’s dollars, costs somewhere about several hundred dollars per Terabyte. Billions of video minutes accumulated every hour. Then viewers would selectively choose the content. And here is where the “programming” skills would apply, however simple.  The viewers could be informed of the content, viewers could be screened by the contributor, and the site would keep count of the volume of viewers. What a great business model! Youtube founders never created any Content.  Youtube just designed the website that funneled content between contributors and viewers. The Youtube founders did not pay a dime for the video production from the likes of any Hollywood entertainment company, which normally hires video editors, writers, audio experts, directors, union production personnel, and so forth. Google bought this simple website model for billions even though Youtube never charged a dime to viewers or contributors to this peer to peer content accumulation website.  Google bought Youtube with the belief that with so many eyeballs viewing the website, it could build an advertising model based on viewer profiles – Google’s forte.

And this example leads to the other juggernaut, Google.   But let’s look at AOL first.  AOL created a portal to get into the Worldwide Web and added a “community of interest” component for monthly fee.  Simple but imperfect. Simple since AOL charged a monthly fee for access to the Internet.  AOL had a good idea, but failed to perfect it.  Youtube revealed that people are attracted by “free” access to the Internet.  But how to make money from free services?  Google answered that. Google came in with this new approach: search for information for free with whatever tool to access the Internet, profile the users searching, target them for advertising, and charge the advertisers pennies on the dollar.  With huge economy of scale, Google creates huge revenues by accumulating billions of users on its search engine with pennies. ($26.01 bill. Gross Revenues by Q2 2017.)

The other juggernaut, Facebook, is a hybrid of Youtube and Google: Users contribute content for free (peer-to-peer model).  FB uses the content exchanges to profile the users and then target advertisers on the computer screen or smartphones. With over 1.5 billion FB users, it also charges minimal fees to advertisers to generate very profitable revenues.

Why am I addressing these models?  In strategic analysis, the strategist must compare successful companies vs. failures.  I previously worked with a startup that attempted to distribute self produced videos throughout the Internet to inform users about tools to repair products or play guitars or sail a boat. The founder suggested to hire professional videographers to produce the content. I objected vehemently.  Why? Youtube doesn’t spend a penny and has such videos already, whatever quality.  Yet, Youtube was bought for billions. Users are not willing to pay a dime for that content at this level. Moreover, to produce quality content would cost a fortune and would make the whole venture unprofitable. The company would need to hire talent managers, editors, and more – essentially becoming Hollywood studio such as Paramount.  Did Youtube do that?

Not one successful Internet company undertook that strategy to employ an army of personnel to produce content.  That is not a profitable venture for Silicon Valley models. Instead, they invest in data centers to produce reliable websites and transactions, and programmers. Jack Dorsey, the Twitter co-founder, once commented that SV internet models know how to build successful companies by understanding the Internet ecosystem.  He was right. Free and Freemium models generate eyeballs. And then the website charges advertisers or businesses for accessing those eyeballs. Brick and mortar approach doesn’t work.

Food delivery companies, which require huge staffs, are funded alright but then fall flat on their faces whenever they scale rapidly. Look at the recent Blue Apron.  A lot of network advertising, but not enough economy of scale to be a profitable model. Note that when Google and FB did grow, their economies of scale improved.  Not so for labor intensive businesses such as food delivery.  It was worse since the founders did not realize the extensive infrastructure and operations to invest and manage when scaling up.  And so followed that San Francisco company that hired those engineers I described in my introduction.  Truly successful internet companies are simply “websites” with some bells and whistles attached.

Posted in Capital and Management, competition, Management and Capital, Marketing, Strategy, Technology, Valuation | Leave a comment

Suckers, Bitcoins, and Investments


Right after finishing lunch with the USPTO director, Jon Dudas, at the Alexandria PTO head office, I bumped into a Physics patent examiner on the metro. He related to me his quandary on why various investments were being made for patent filers who claim to be able to draw nuclear energy from water. I replied by quoting from the venerable P.T. Barnum phrase that a “sucker is born every minute.”  This short prelude begins to explain my thoughts about I.C.O.s and the many millions being raised by tech companies through ICO sales.

Before discussing ICOs, let me distinguish them from Bitcoins, the “other” crypto-currency. Bitcoins are finite in number.  A brainchild of a programmer, they are digital crypto-currencies that can be transferred from one party to the next with a form of systemic confirmation entitled the blockchain process. The key here is that a programmer created this currency – not an economist or governmental entity.

During my business school tenure, I took a course in international currencies and discovered that hands free economics was not the sole influence on a currency valuation, but also international policies. Once the gold standard for the U.S. dollar had been removed, more than market forces influenced its trading values. Why?  If we take China as an example, export leaning countries make sure that their currencies are priced competitively to encourage exports.  That influence can materialize in many forms – prime rates, the quantity of currency in circulation (through global purchases or printing controls), inflation, and other macroeconomic factors. Not so with bitcoins.  This currency’s value is influenced by supply and demand, ironically priced most often against dollars. The bitcoin is in no way influenced by governmental policies.

Since bitcoins can obviate standard currency controls and financial institutions, they can be traded and controlled anonymously. That is an attractive feature to groups that prefer that non-transparent feature. Recent worm attackers demanded bitcoins as a means of payments while still remaining anonymous. That way they avoided prosecution.  That feature alone would not be acceptable to the U.S. Treasury, whose mandate is, in part, to monitor and control illegal financial or other international activities.

To reiterate my earlier comment, the key difference I note between bitcoins and ICOs is the finite quantity of bitcoins. ICOs are not restricted and seem to sprout from many startup technology companies.  ICOs remind me of Bernie Madoff Ponzi scheme: in both, you create a digital record of fictitious trade and then show incremental value, however arbitrary. Anyone with a semblance of computer programming background can create an ICO.  First, each line item or currency needs a unique identifier.  A random number generator can create each currency with a unique number. Then build the database and insert the counter-party buying with dollars that ICO currency.  Any decent programmer can create that ICO system within a week.

But an ICO is neither a currency nor a stock.  Let us look at stock (or shares.) The quantity and type of stocks are declared as authorized in the certificate of the incorporation filed with the Secretary of State within the incorporation state. They are declared finite.  In order to sell more shares than originally authorized, the company must amend its certificate.  And this is public information.  More to the point, stocks or shares have vested ownership rights detailed in the incorporation laws of the State and in bylaws of the company. As part of those rights include the privilege to inspect corporate books and financials, whether that shareholder owns millions of shares or even one. What ownership rights are bestowed to ICO holders?

Again, I need to revert to earlier blogs about rules and regulations.  Many laws were created to protect the rights of the consumer.  For example, a Silicon Valley company recently refused to provide any financial information to an employee who owned vested shares in the company.  The employee needed that information to value the company. As the company was incorporated in Delaware, the employee filed a lawsuit against the company and won undeniably.  I doubt that ICOs afford such remedies.

So this raises another question, how are ICOs valued without accessing financial information from the company? What recourse does an ICO purchaser have against the company under corporate law? We all know the answer to this: none.

Bitcoins, by the way, have exploded in value, but bitcoins were issued once with finite quantity. And they can be converted in the marketplace for cash. ICOs, in contrast, are not restricted to predefined quantities and are not fungible into cash. Any company can issue ICOs and explain to investors the purpose of the ICO raise.  With thousands of companies out there, there is no maximum ceiling to their issuance.  They are not required to file with the state their crypto-currency issuances. They are not fungible currencies.  And they don’t represent equity in the company.  As such, there are no ownership rights in a company.  The Madoff scheme has similar characteristics. The scheme had unique but fictitious financial instruments.  The Madoff securities were not currency or convertible into cash, something akin to ICOs.  The reality was, under the trial, all investors owned nothing.

In fact, I cannot fathom what is the economic value behind an ICO. The ICO is in no way a state registered security when one creates a corporate entity, although it is being used like a bitcoin as a means to attract investors. (Securities laws were promulgated to protect investors from fraud and misrepresentation and instituted as the means to control and sanction companies through punitive and criminal sanctions for misrepresentations.) If it is neither a bitcoin, a stock, nor a bond, then it is an artificially created crypto-currency that can be developed by any programmer within a few days. It is simply a digital record.  All a programmer needs to create a crypto-currency is a database with a jpeg file representing the currency, and the counterpart owner of that crypto-currency.  This so-called “unique” code and crypto-currency have raised millions. But as P.T. Barnum clearly pointed out, there are many “suckers” out there.  In a few years, we will witness how crypto-currency buyers will fare.

Posted in Capital and Management, Management and Capital, Technology, Valuation | Leave a comment

Websites to Research for Technology Business Plans

WomanNumbersWhen writing strategic plans, one needs corroborative data to insert into the cells in one’s spreadsheets.  For example, I once reviewed a Russian business plan where a driver received US$600 a month.  Personnel costs represent a huge percentage of the annual recurring costs of operations.  One has to be reasonably accurate. Was that Russian number for the Russian monthly salary realistic?  Upon careful inquiry, the answer would be yes.  However, that number would greatly underestimate the actual costs for an identical driver position in NYC.  Numbers should be realistic and researched. Small variances in costs less than 10% are acceptable.  Anything beyond that is suspect. Details matter when writing a business plan.

So, the first, major step to take in order to draft a business plan, one must execute due diligence by researching everything about the product, company, markets, and competitive environment.  The best tool is the computer and access to the Internet.  Here are some websites I definitely access to develop a business plan:

For Valuations, investment and Stock Option trends:

       For Personnel Costs:

For Macro/Micro-economic trends

Industry specific journals

For Competitive Environment


For Intellectual Property Filings – Prior Art patents advanced search

Posted in Capital and Management, competition, Entrepreneurship, Presentations, spreadsheets, Strategy | Leave a comment

Is the average taxpayer subsidizing those wonderfully, successful Silicon Valley companies much too much?

GPS Satellite

GPS Satellite

The typical Silicon Valley company has attached itself to the coattails of taxpayers or older established companies, all in the name of disruptive technologies.  Without these tax incentives, would these companies be so valuable, or, worst, ever get off the ground?

Let’s look at Uber and AirBnB.  Both companies rely heavily on geolocation.  Geolocation comes predominantly from the GPS signals from orbiting satellites and, secondarily, from the wireless radio towers. What are the costs related to GPS?  The DoD, originally tasked to place these satellites, spent over $12 billion.  There are 24 satellites orbiting the Earth at the distance of 11,000 miles. Mount Everest, as a comparison, only measures over 5 miles tall.  And these satellites lie on fixed orbital paths. With the $12 billion as the original investment, the U.S. government spends over US$500 million annually to maintain those birds. The annual GPS maintenance costs charged to Uber ($66 billion valuation 2016) or AirBnB ($30 billion valuation 2016) are zero.  Meanwhile, the average taxpayer foots that annual bill.

Let us be more accurate.  The GPS signal is just part of the process for geolocation.  To get better accuracy, one needs the telecom radio towers transmissions. The average radio tower costs anywhere from $250K to almost a $1 million (depending on capacity).  Sprint, a smaller carrier, operates over 70,000 towers without which smart cell phones would not function.  By taking the median cost for a tower times the total numbers, Sprint has invested over $3.5 billion.

What the costs to Uber and AirBnB?  Again, zero. The carriers allow these companies to access the geo-positional data through APIs. The software companies overlay that data over their own digital maps and use the data derived from both GPS and towers to pinpoint positions.  What seems peculiar to the average analyst is how AirBnB and Uber can be valued as high or even higher than the companies that invested in satellites and towers, which require substantially more employees and engineers to manage than software apps.

Let us not stop here: Tesla.  Tesla/Solar City also derives additional tax subsidies to the tune of over $4.9 billion dollars.  The results are interesting: Tesla $70k electric cars are priced beyond the average consumer, whose taxes fueled Musk’s companies. Meanwhile, Tusk’s personal wealth increased to over $10 billion through these two solar and car companies.  How? every car he sells has tax incentives to the tune of $7.5k federal and state related credits (California) each.  And when the federal subsidy ends, then California will kick in more subsidies.  (Wonder why California taxes are so high? Ask Musk.) His Nevada lithium manufacturing facilities also obtained huge state and local subsidies.

We should also bring net neutrality in this conversation.  The fact of the matter net neutrality suggests that any Internet company pays the same to access the internet as any individual.  It means that any company can send billions of emails without incurring additional costs.  Another way of looking at it in terms of a company mailing envelopes through the post office.  Traditional companies spend so many cents per each envelope it mails through the post office; the more mail, the higher the bills.  Not so for technology companies sending out emails or other transmissions through TCP/IP protocols. Yet those emails must be transmitted through traditional fiber optic cables costing billions. Sea-Me-We III, a submarine cable originating in Asia and ending in Europe, cost over $1.5 billion to build. Across the Atlantic, the submarine cable costs over $600 million.  And maintenance is anywhere from $25k to $50k a day.  The average cost to an Internet company? Pennies, if at all.

We all hear about the great, disruptive technologies from these companies. And the wealth that these founders have accrued.  In fact, the Google co-founder, Sergey, has enough money to buy out half of his local town, Los Altos, California.  All these technology companies have surged the average cost for housing in California to over $500k.  And, still, the average taxpayer doesn’t benefit.

Another point of view is to see the true economic costs what happens when subsidies die or infrastructure investments are demanded. In the case of Hong Kong, the government ceased providing tax subsidies this year for electric cars. The result—no electric car sales. Another example is telecom infrastructure.  Google complained about the lack of fiber optic development in the U.S. by telecom carriers. Google thought it could do better than Verizon’s 170,000 employees (Google has over 40,000).  So it decided to deploy terrestrial fiber, appropriately named, Google Fiber, in a Kansas town. The result? Yes, the fiber was fast and speedy. But it stopped deploying beyond two to three towns in Kansas. (Imagine if Google were in charge in deploying fiber optic networks nationwide, if none existed, what would have happened.) When renamed Alphabet, Google has decided to sell off that fiber optic network. It, therefore, demonstrated that it was more profitable to run its business with net neutrality. Even recently, the Chinese military has refused to share the GPS signaling to DiDi (the “Uber” industries) in China to implement self-driving cars.  Without GPS, those cars will be aimless. (We can safely assume that the Chinese military has a budget that it wishes not to share with the private sector.)  Does this mean that DiDi has to launch its own satellites (each satellite costs about US$50 million without including launching costs)?  Will the satellites change DiDi valuation since it must invest substantial capex, diminishing its margins?

These events confirm one thing: net neutrality, tax subsidies, and incentives have all supported much of Silicon Valley’s economic success at the expense of taxpayers, not by some crazy, disruptive technologies where few benefit economically.  And then see why these companies have huge valuations per employee.:

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