At CoRise, we’ve had a very strong view on the future of the tech & media start up scene in NY, which I’ve blogged about before.  So when I recently met a prominent VC, who was a former entrepreneur with a successful exit, I was curious of his opinion on the current state and future of NYC.  He was clearly enthusiastic on the potential of NYC, but he made several cautious remarks as well that I thought were interesting.  He seemed to agree with many of my Top 5 reasons why I was particularly bullish on the future of the NY scene:
  1- Mayor Bloomberg initiatives (like the new Cornell campus) bringing much needed engineering talent
  2- the new Facebook presence doing much of the same
  3- the recent NY passing of Boston in December in VC funding
  4- the growth of accelerators to nurture young companies, like ERA
  5- and the direct access to Madison Ave ad dollars and Wall Street money

However, he gave me somethings to think about as challenges for the growth of the NYC tech scene:

  1- Dearth of stablished large Internet companies – While NYC does have Tumblr, Foursquare, Etsy and others, it is lacking Internet companies the size of the ones near Silcon Valley.  There are no Facebooks, Googles, Ebays, or Yahoos.  He pointed out that having these large companies not only provides a talent pool to poach from, but also provides a stability from the entrepreneur point of view – this means that an entrepreneur can take a shot at a startup in Silicon Valley and if he fails, can merely rejoin one of these large companies.  His/ her family has a mitigated financial / career risk.  In NY, there arent as many fall back options (AOL?), and hence to move here and take a shot may be more risky.  And, on the poaching of talent point, the NYC startup scene is forced to poach each others talent, creating more pressure.

  2- NY VCs are different.  In his opinion, NY VCs were very different than the west coast variety.  From what he has seen, NY VCs are more focused on metrics, numbers, valuation, monetization & profitability.  This isn’t to say that these things aren’t important, but he thought the West Coast VCs were more willing to bet on a vision or a management team, seeing the other metrics as secondary.  Very interestingly, he also pointed out that NY VCs also want board seats (and are maybe obsessed with them).  While the West Coast also takes board seats, he didn’t think it was as much of an obsession.  He also questioned the value of board seats: it takes a lot of work from the VC side and the VCs may not really be that impactful anyway – at the end of the day in this stage, the future will be much more impacted by the management team.  Lastly on VCs, he pointed out that there really just isnt that much money in NY vs Silicon Valley.  Therefore, if you were an entrepreneur and wanted to maximise your chance of getting funding, the best thing to do is move out west.

  3- Cost of Living.  He also thought while the cost of living in the NYC area is an issue, it’s really not that much different than living in the Valley.  Further, new areas like DUMBO can provide more cost effective living opportunities.  So while this is an issue, it’s not the most impt in his mind.

I think that all 3 of these points are valid, but not insurmountable challenges:  
    First, on his #1 point of talent accessibility, if one of the most disruptive payment companies can be born and thrive in Des Moines, clearly geography should not be the limiting factor.  Further, as the Etsys, Tumblrs, Foursquares and others grow, there should be more opportunities for a talented engineering pool.  Additionally, we expect offices like Google’s to be established by Facebook and other successful
/ emerging Internet companies Twitter.

  Second, on his VC point, NYC VCs may adapt to embrace more of the west coast culture.  Moreover, I think what’s missed in this point is the NYC hedgefund / Wall Street money.  While VCs (with traditional LPs) are one funding source, the NYC access to these funds is almost unparalleled.  And, these entities are looking for diversification / additional growth.

  Third, I agree that NYC area is expensive.  However, less costly areas of the are are blossoming with startups and I think this only spreads out into further reaches of the tri-state geography over time.

So, while I’m not trying to be ignorant as to the challenges in front of the emerging NY tech / media scene, I am still very optimistic.  There is a tremendous amount of opportunity that is untapped and I literally think we are just at the beginning of the growth curve.  

Lastly, who’s to say that the east coast startup scene needs to exactly mirror the west coast scene anyway?  While we all respect the Silicon Valley ecosystem, maybe there is more than one way to build a vibrant community…and if any ecosystem can do it, I’d bet on NY.

Bob Peck
President, CoRise CO. LLC
   

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We at CoRise are very happy to announce that our latest report on the convergence of Media and Finance is now available on our website.  The report is based on our conversations and observations across the finance and media ecosystems.  

Much has been said about disintermediation in markets, made possible by new technologies & more efficient systems. In the past, this has in actuality been an introduction of new intermediation forms, leading to more numerous & complex intermediation functions. The truer disintermediation has yet to take place, but, like its antecedents, this too will be a transference to intermediation of a new order: Networks & their ecosystem of services will be new intermediaries, augmenting roles previously
dominated by institutions.

We think new technologies, regulations, and data are enabling a host of new entrants into the finance vertical.  Each offers it’s own unique advantage or benefit.  New models, like Crowdfunding and private capital, are emerging from voids in the ecosystem.  Payment technologies are opening up opportunities that didn’t exist before.  Consumers are moving more closely to the merchant, disrupting previous intermediaries.  Alternative marketplaces and currencies are creating valuable trading systems. The exchange of information is shifting to the exchange of ideas.  

This all sets the stage for new capital flows and true disruption, predicated on a more efficient economic model and information flow.  As information & capital, investors & borrowers co-join, the new (dis)intermediary will likely become the network itself.  This will create opportunity and risk for incumbents in the system – the key will be careful assessment and navigation

Robert Peck, CFA
President, CoRise Co., LLC 

At CoRise, we had our monthly board meeting last night and it’s always thought provoking.  We are lucky to have Jonathon Axelrod, Aleks Jakulin, and Andrew Sispoidis as our advisors – all are already accomplished entrepreneurs and they continue to keep their fingers on the pulse of emerging trends.

One of the topics we discussed was around data / privacy (which are inevitably intermingled), and the impending impact on business models.  Ironically, Nicholas Carlton of BI today published a Jeff Jarvis quote relevant to our conversation – he quoted Jeff as saying that the new No Follow agreements will make content more expensive to the consumer – you can see that article here.  I couldn’t agree more.  Let me explain.

Google taught the world that data has value – and the world reacted.  Facebook taught the world that Privacy has value – and the world reacted.  So as content or service companies think about the  evolving landscape, they can customize their offerings for their services.  For example, Company A can do a service for a client.  It can offer the service cheaply (or even for free), if the client permits Company A to see their data and there is enough value in the data for Company A.  Or, Company A could charge a fee for its service and NOT see the clients data (ie do the service / process on the client’s servers).  The great part about this is that Company A would likely price its fee so that it’s indifferent to whatever the client chooses.  The client also benefits as it can decide between a cheap fee (if its data isn’t that sensitive) or paying a larger fee to maintain privacy.

This “new” business model has been around for the ages and a simple analogy would be night clubs.  When I was younger, I would wait outside the nightclub to get in for the right to then pay a cover charge.  Yet, pretty woman were always allowed in without waiting and didn’t have to pay a cover charge.  The club saw the value of having pretty women in its club, while my value to them was …well…not worth much.

So, I expect that as the Gov’t, corporations, and consumers focus more on personal data and security, we’ll see many more business models develop, playing on whether the client minds sharing his data.  Several companies are already doing this, but I’d expect more to do the same – it’s likely the “new” business model…..

Robert Peck, CFA
President, CoRise Co
http://www.CoRiseCo.com 

CoRise has just released a really interesting report on the value of networks.  Leveraging off a post my one of my partners, Dan Ramsden, we were able to compare some of our thoughts on a network’s value and the Facebook’s IPO document (S-1).  

There are some very interesting similarities, particularly between Mark Zuckerberg’s letter to shareholders and our theories.  What we thought was most interesting though was the implications on valuation.  While most investors will look at the value of $FB on an Enterprise Value to Revenues or EBITDA, as well as on a PE basis, we tried to look at it a different way.  We wondered, at the $100b high end of the range valuation, what would that imply in lifetime avg revenues from a member.  We took the net present value of this and derived a value of merely ~$400.  

Very interesting….

Bob Peck, President CoRise Co
http://www.coriseco.com 

By now, we are all aware that it is likely we get the long desired Facebook ($FB) S-1 this week.  We finally get to see the financials and more details on the company.  Bloggers and pundits will write for the next few months about valuation and what $FB could be worth once it starts trading.  The market value of a stock has always been so intriguing to me, as it is the ultimate “wisdom of the crowds”.  The market takes all the available public information, crunches some numbers and adds some opinions to shake out at an agreed upon value of the stock.  A company’s public market price is the intersection of practicality and theory – let me explain.

Let’s take an example to walk through what I mean.  Pretend you were in a room with ~1000 other people, and I announced that the person who guesses the answer to the following question would win a beach house.  I’d likely have your attention and you’d take your best shot at guessing.  The question is simply, “Guess a number between 1-100 that is 2/3 of what the average of what everyone else will guess”.  Pretty straight forward.  I’ve asked this question for years to interview candidates and I always care much more about the logic than the answer.  Many follow this logic: “Well, assuming an even distribution, the average of 1-100 is 50.  Two-thirds of that is ~34.  So my answer is 34.”  Not a bad guess.  But there is a flaw here – if everyone follows that logic, people will answer 34, and 2/3 of that is ~22.  Hence, 22 is the best answer.  Or is it?

If people in the room follow this logic, they may soon realize that everyone will know to say 22, so the real answer in practice should be 14 (two-thirds of 22).  Then, people may realize that this logic can ultimately keep being repeated, taking the answer down to ~1.  So the smartest people in the room realize they should say 1 and submit their answer.  In THEORY, they are correct.  But in PRACTICE, 1 is a horrible answer – not everyone in the room will think that far through the problem and the actual answer will be something much higher (in fact in my practice, the answer tends to be around 30).

This example points out, that sometimes the best math / logic and theory are over powered by the human factor (flaws, emotions, etc).  So what’s my point on $FB?  My point is that, we are about to see a lot of ink flow on the suggested value of $FB and in the near term trading, it won’t matter.  So don’t be surprised by the stock fluctuations over the first week – the “humans” will set the price….

For those looking for a more sane conclusion, take comfort that in the longer term, stocks ultimately trade to their intrinsic value (the net present value of their cash flows) – but it can take some time…

The next few months should be fascinating…..

 

Robert Peck, CFA
President CoRise Co LLC
www.CoRiseCo.com

 

I was reading an interesting article by one of my favorite bloggers, Bob Cringely, where he brought up the notion that maybe Apple’s Siri infringes on old Excite patents.  I am not a lawyer and have no idea if that’s true or feasible, but it once again underscored in my mind the current push on IP by the major tech companies.

The value of patents has never been more evident than in recent times.   Companies are building up their portfolio of patents not only to protect their intellectual property, but to also fend off lawsuits from competitors.  Billions of dollars are flowing into the space, as evident in the Apple / Microsoft consortium’s $4.5b buy of Nortel’s ~6k patents in June 2011 (the largest patent buy in history!) and Google’s purchase of Motorola Mobility for ~$12b (of which ~$7b of value is speculated as the value of Motorola’s 17k patent portfolio).  Many believe the main motivation behind Google’s move was to protect against future Android lawsuits by Apple, Microsoft and others.  This is a lot of money but its likely well justified when put in perspective of the large markets and revenue opportunities these companies are trying to protect.

However, it wasn’t until I started digging in a little more that I realized that protection from a competitor’s lawsuits is not the only reason patent value is being highlighted lately.  The main culprit: Non-Practicing Entities or NPEs (sometimes called “Patent Trolls”).  NPEs are companies that don’t have any operating businesses at all, but have many patents that they use lawsuits to extract value from operating companies.  Exemplifying this, as the WSJ pointed out this year, luminaries like Jay Walker (the founder of Priceline) created Walker Digital in 1994 to house his patents;  however, it wasnt until this year that  he partnered with IP Navigation Group to “monetize” the patents, handing out over 30 lawsuits against large players like Google and Apple.   Another NPE example is Lodsys, who in May 2011, filed suit against App developers Rovio (Angry Birds developer) and Electronic Arts (Sims 3) – Apple and Google joined the fray to support their app developers.

However, for anyone even remotely interested in this topic, NPR did a fantastic piece on the underbelly of the increasing NPE lawsuits and Nathan Myhrvold’s Intellectual Ventures in particular (full version here).  Intellectual Ventures is a NPE and holds a vast array of patents that it “monetizes” through lawsuits.  NPR did some math around the investor funding of Intellectual Ventures (IV) that indicates Intellectual Ventures will need to sue for ~$35B  in revenues over the next 10 years (up from $2b in revenues today) to provide the necessary returns for the investors who put $5b into the company!  I point to all these examples to underscore the gigantic market for patent lawsuits.  Now we can see why Apple and others are spending so much money in accumulating their own patents: it’s for defense against not only competitors, but billion of dollars of lawsuits from the non operating companies, like Intellectual Ventures.

So maybe Cringely is right – maybe a lot of the voice / gesture technology we just saw debut at CES technology could be attacked by NPEs.  I dont know.  Two things are for sure though: patents are hot and NPEs need to generate revenue.  While I obviously believe in protecting IP, I cant but help feel it’ll be the entrepreneur / consumer that loses in all of this….

Robert S. Peck, CFA
President CoRise Co. LLC


I spent some of the recent break catching up on some reading I hadnt had a chance to get to, when I came across a favorite author of mine Bob Cringely (nom de plum).  He had written a great article on why startups are able to out innovate the big established companies (here).  When you think about it, it’s absurd that a company with billions of dollars of cash can get disrupted by “2 guys in a garage”.  It’s long been a question on my mind and Ive heard many answers: big cos aren’t nimble, they’re too focused on their core, management is distracted  on rewards tied to current business, etc.  All of these are very true, but I think at the heart of the dilema is one simple equation: risk vs reward.

Let me tell you more what I mean.  My background is in stock valuation and asset management.  There is an old adage on the Street, “you dont get fired for buying IBM”.  Very true, many incentives on the Street tend to have managers just retain their jobs and earn a GOOD bonus.  One could go for a GREAT bonus, but he could lose his job if he’s wrong.  So most play it safe.

The same is true in the executive / board ranks of companies as well.  Based on my years of conversations with top execs where we discuss missing buying “the next microsoft, Google or Facebook” one thing is very clear: managers / directors would need to put themselves on the line for something that may not even prove out for many years. Take for example $YHOO not buying $FBOOK, when it could have several years back for $1b, reportedly.  Could you imagine how shareholders would have reacted?  $1b for a company with almost no revenues?  Especially with MySpace leading the sector and user bases that seem fickle (ie Friendster)?  The CEO would likely get fired in the next 24 months or have so much pressure on him to produce revenues NOW, that he would have destroyed what Mark Zuckerberg had the patience to build (ie what happend to MySpace).  The board, would have been ridiculed constantly in the press and directors would get replaced.  There would be a $1b writedown and $FBOOK would not exist today.  The risk / reward is clearly not in management’s favor…

Therefore, I think that the only way to have true disruption, innovation, and long term forward thinking is to give a board and management the “freedom and time” to make those bets.  Could you imagine where $YHOO would be today if its leaders had that leniency?  If Mark Zuckerberg could have been given $YHOO’s vast resources and connections while NOT being pressured to change his approach, $FBOOK would be even bigger today – hard to imagine.

But shareholder (PMs at large funds need to hit year end numbers to get their bonuses) and therefore time pressure gets shorter on companies to perform NOW.  Some funds have longer horizons (Legg Mason, Dodge & Cox, etc.) and act as a nurturer of the companies they own – that’s why one sees companies trying to woo the most friendly shareholders.  But it’s tough to have all your shares placed with owners will allow big bets that may not pay off for years…and maybe that why disruption from startups will be inevitable for many years to come….

Hence, the risk/reward equation may be the entrepreneur’s best friend.

Robert Peck, CFA
President CoRise Co., LLC