Examples of various networks failing at scale

Most solutions will inevitably break when used at scale. These are two recent examples.

AirBnB’s network scales to extend it starts disrupting entire neighborhoods

https://www.bloomberg.com/news/articles/2019-11-06/miami-beach-airbnbs-top-market-in-u-s-as-charlotte-grows-rapidly

Political campaigning on social media gets way out of control after politicians attempt to scale up the method which got President Obama elected to office 

https://www.bloomberg.com/news/articles/2019-11-07/google-considers-changing-its-political-advertising-policy

Technology eco-system scales up operations in California thereby triggering the housing crisis.

https://www.bloomberg.com/graphics/2019-california-housing-crisis/

Moderation and self restrain is not common when caught up in a winner takes all situation

 

Crypto-currency exchanges

Business model

  • Pricing model
    • USD 80K initial listing fee
    • fees on each transaction
  • Enterprise sales acquisition approach
    • acquisition channels
      • LinkedIn
      • Crypto-conferences
    • Cost
      • USD2500/month for sales staff
      • USD4000/month for engineers

Landscape

  • Over supply of exchanges versus crypto projects
    • Crypto-currencies have tanked in 2019
    • There are more than 2000 exchanges right now
    • 20 new currencies are minted each month
    • There is a lack of differentiation between exchanges
  • crypto projects are reporting an exceeding high level of failure rates
    • due diligence traditionally handled by VCs for traditional startups are left to end consumers for crypto projects
    • most projects do not have a sound use case
    • teams tend to be poorly managed
  • Uneven playing field
    • US media’s extensive distribution network is the primary advantage of US based exchanges
      • Binance is the largest exchange
      • Binance ability to tap into engineering talent in US has allowed it to be the trail blazer helping it garner constant media attention
    • Chinese crypto-currency companies are attempting to penetrate US and Europe by hiring talents with fluent in English

Complementary assets for Biki

  • Parent company’s crypto news portal
  • Parent company’s engineering knowledge in building exchange software

Microsoft university penetration strategy

Tools of the trade

  • content marketing like documentation and tutorials on how to use tools
  • Speaking at events as first point of contact for lecturers and TAs
  • Sponsorship through hackathons
  • direct outreach to educational TAs
  • support for student mentorship programs

Acquisition

  • Reach to TAs to try out tools for free
  • Setup booths at hackathons and conducting workshops
  • Train student on the use of MS tools so that they can become successful mentors – GitHub strategy
  • Provide budget for student groups who want to organize learning sessions involving how to use the tools

Feedback mechanism /

  • track the conversion rate of documentations visit to corresponding sign up levels
  • track time on documentation
  • listen for feedbacks when interacting with students during hackathons to figure out portions of the documentation that are confusing

Metrics

  • track YoY student traffic usage during lull periods to determine if baseline is improving.

NYMT rotation from agency RMBS to CMBS

NYMT has been observed to shift much of its portfolio to CMBS from agency RBMS over the year.

This is to guard against the likelihood of prepayment risk and reinvestment risk associated with the lowering interest rate environment we are seeing right now as the US/China trade war forces lower interest rates and a flatter yield curve. The downside to this strategy is that most of the loans will be maturing within 10 years as opposed to 30 years.

Performance across various interest rate environments

In a stable interest rate environment a rotation to RMBS can help guard against reinvestment risk and prepayment risk since loans mature over a period of 30 years and borrowers are unlikely to increase their rates of prepayment.

And since these are agency RMBS, the government become  the ultimate underwriter in the event of defaults.

In an environment where interest rate increase and spread widens, increase in short term interest rates pinches into profit margins thus lowers net interest income for all both types of MBS. Also likelihood of default increases.

Overview of CMBS versus RMBS

CMBS typically matures over a 10 year period. It pays interest during the entire period with a final lump sum principal payment at the end.

Borrowers will usually extend another loan to pay off lump sum as the current loan matures. The new loans is usually at then prevailing interest rates.

CMBS are usually backed by 10 to 300 commercial properties.

RMBS matures over a period of 30 years. It pays both interest and principal steadily over the entire course with increasing amounts of interest paid to the end.

RMBS is usually backed by thousands of homes.

Types of risks:

  • default risk – property does not generate rent to cover interest
  • maturity risk – borrower can not repay final lump sum at maturity
  • prepayment risk – more is paid down rapidly so less overall interest income generated from loan
  • reinvestment risk – associated with prepayment risk. If mortgage is paid down fairly quickly due to low interest rate environments, owner of lender will be forced to lend out loans in prevailing lower interest rate environments
  • extension risk – less principal is paid down by borrower per period because interest rate has increased

Of the above CMBS is usually only subjected to default risk and maturity risk.

Arrangements are within contract to guard against prepayment risk and extension risk in CMBS.

Default risks for CMBS are low unless tenants are no longer able to pay for rental of commercial space. Senior CMBS were not much affected even during 2008 / 2009

Other issues for consideration

Subordination are important points for consideration. Senior loans with 30% subordination means it will only start experiencing default when 30% of tranche beneath it has defaulted.

CMBS annual default rate peaked at 4.07% in 2010 while cumulative default rate peaked at 13.52% in 2013.

Related references

https://www.lordabbett.com/en/perspectives/fixedincomeinsights/investment-brief-commercial-mortgage-backed-securities.html

https://www.sec.gov/ix?doc=/Archives/edgar/data/1273685/000127368519000074/nymt-06302019x10q.htm#s4E8231C084AE58E780F8E58D6BD4C381

General thoughts on Mark Zuckerberg’s warning of the internet’s role in Authoritarianism displacing Democracy

  • The polarization between democratic systems and authoritarian systems is becoming more apparent as China leverages its growing middle class to project it’s influence on the world stage a strategy that US has been utilizing for the past decades.
  • Facebook is a vehicle for projecting American values overseas.
  • The African continent remains a land grab for the two different regime types. Thus far, China has won out on the physical infrastructure and government level while FaceBook has won out on the community grassroots levels.
  • For the C Suite especially CMOs to execute their jobs well they need to be focused on what’s happening out there in the world as opposed to what’s happening within their own functional organization. It’s the VP of marketing’s job to handle what is within their own marketing organization.
  • Its a time when US companies will need to navigate the international markets while managing the challenges to their American values.
  • The Chinese government has done a better execution on that front with their One Belt Road initiative by clearing the path at the government level to facilitate the unhindered expansion at the commercial level by its enterprises.
  • Western media is working at full Rev to control the narrative frames that drives public opinions.
  • Mark Zuckerberg has masterfully leverage recent trends to reframe Libra as a champion of democratic ideals as opposed to a disintermediation force on central banks around the world.

Related references

Zuckerberg Warns China’s Censored Internet Could Still Win Out
https://www.bloomberg.com/news/articles/2019-10-17/zuckerberg-warns-china-s-censored-internet-could-still-win-out

Apple bows to China by removing Taiwanese emoji

https://qz.com/1723334/apple-removes-taiwan-flag-emoji-in-hong-kong-macau-in-ios-13-1-1/

Christian Dior apologizes for omitting Taiwan from Chinese map

https://www.breitbart.com/national-security/2019/10/17/china-bullies-christian-dior-apologizing-omitting-taiwan-map/

China exerts pressure on NBA to fire key executive for tweet on Hong Kong unrest

https://www.nytimes.com/2019/10/17/sports/basketball/nba-china-adam-silver.amp.html

Solomon island switches relationship to China from Taiwan

https://www.nytimes.com/2019/09/16/world/asia/solomon-islands-taiwan-china.amp.html

Kiribati switches relationship to China from Taiwan

https://amp.theguardian.com/world/2019/sep/20/taiwan-loses-second-ally-in-a-week-as-kiribati-switches-to-china

Southeast Asia balances between Chinese Markets and US defense

https://www.nytimes.com/interactive/2018/03/09/world/asia/china-us-asia-rivalry.html

Facebook Warns Washington That Beijing Wins If Libra Plan Fails
https://www.bloomberg.com/news/articles/2019-10-17/facebook-warns-washington-that-beijing-wins-if-libra-plan-fails

 

 

An unchanging constant as the source of trust

Trust is the ultimate source of wealth in any society. The level of manifested physical wealth correlates positively with the level of perceived trust members of society have for an entity.

When an entity, be it a phenomena or a behavior, is observed to be consistent across time without much falter, it soon becomes accepted as the norm. Overtime this norm gets deeply embedded within a society and becomes an integral part of its culture. It thus becomes trusted and a source of credibility.

Societal commerce is built on trust. Trust accumulated through consistency overtime can be converted to other forms of tangible currency. These currencies can then be used to direct resources within the society towards the achievement of very material goals.

When comparing between two entities that are embedded within the cultural fabric of society, the one that exhibits a higher level of consistency inevitably gains more trust. This explains why while fiat currencies comes and goes, the value of gold remains consistent across time.

While it might be tempting to equate trust with value, there is a subtle difference. While trust elicits value, value need not necessarily elicit trust.

Expressing the entire civilization’s undertaking at any point in time as an linear equation, any essential variable that happens to be the most restrictive in supply at that point inevitably becomes the most valued. However wide fluctuations in value does not elicit trust in the long run.

Sources of trust

  • the rotation of seasons and our subsequent practice of agriculture
  • the constant speed of light and it’s use in Einstein’s theory of relativity
  • gold with its scarcity and it’s persist use as a store of wealth
  • well run institutions with well defined constitutions
  • fiat currencies with under sound government regimes
  • individuals who exhibit consistent behavior overtime

Qualities of viable currencies

  • Ability to be divisible
  • Ability to be moved
  • Ability as a store of wealth overtime
    • consistent levels of supply
    • scarcity

Functions of currencies

  • a means to facilitate transactions
  • a store of wealth

Examples of trust erosion

Example 1: Michigan Pulls $600 Million From Ken Fisher an individual After Lewd Remarks

https://www.bloomberg.com/news/articles/2019-10-12/michigan-pulls-600-million-from-ken-fisher-after-lewd-remarks

Example 2: 1918 Germany as an institution, towards the tail end of WWI.

When it became evident that the country will loss the war, it experienced increased inability to raise debt to in domestic currency denomination to continue financing its war efforts. It’s currency soon lost it’s reserve currency status and it was increasingly forced to denominate debt in foreign reserve currencies.

Post WWI debts denominated in domestic currency where inflated away through printing of cash by the  German government to pay of debts denominated in foreign currencies.

Example 3: Africa use of glass beads as a failed form of currency

Europe was able to cheaply produce this in abundance . Europeans for a period were able to exploit this asymmetry by exchanging cheap glass beads for valuable natural resources. When value within the African society became depleted,  Europeans were eventually able to subjugate the entire African population and exploit them through the slave trade.

Example 4: Wall Street crash and the Great Depression of the 1930s.

Bankers increasingly became concern of easy credit driving share prices to stratospheric valuations. An eventual tightening of credit lead to rapid deleveraging within the system. The lack of trust within the system prevented the circulation of money and credit. The central bank ultimately had to step in to restore trust.

It did so by first preventing the flight to value. This was achieved through the banning of conversion of USD dollar to gold.

Example 5: An ongoing slow erosion of fiat money

With the deliberate pursuit of constant 2% yearly inflation by central banks around the world current fiat money are failed stores of wealth .

The currency of the Roman Empire is a perfect example of where we will be headed. Overtime less gold per coin is used. Their currency was ultimately replaced by paper which allowed rampant printing by the government during times of war. The effects of inflation eroded the Roman empires currency as a long term store of wealth.

Examples of persistent sources of trust

  • The institution of the Catholic Church
  • The consistent adherence to a set of sound principles by Berkshire Hathaway’s reinsurance business over multiple decades. 
  • Federal reserves consistent adherence to the dual mandate of 2% inflation and low unemployment rates

Conclusion

To build trust is to build wealth. The key to doing so is to adhere and operate on a consistent set of sound principles over across time and in all environments. Being slow and steady is a pre-requisite of this process.

Related readings

Observed unwinding of credit in the market

Priori

  • Federal reserve starts reducing debt bought and brought onto their balance sheet during 2008
  • Federal reserve went on a series of interest rate hike from the period of 2016 to 2018
  • Trump starts Trade war in 2017 resulting in reduced global demand for American exports

Liquidity concerns experienced in sections of the markets around the world

Riots and unrest

Related readings

 

Oil’s relationship with the macro economic environment

Price of OILU jumps 34% following news on 50% Saudia Arabian refining capacity destruction by Iranian drones.
At the height of the Oil crash in 2016, USO traded at USD8.33 per share on 2nd August 2016. It has since recovered

The price of oil has an positive correlation with likelihood of war and a booming economy. It has a negative correlation with recession and oversupply.

The price of oil did not hit zero even during the height of the oil crash.

Launch Scale conference with Jason Calcanis Day 2

    Jason does an impression of Trump

Brandon Brown, Grin

The founder needs to sell the product first before bringing onboard any sales representatives. We need to build out the play book first. PlayBook must help uncover the pain and map the pain to the problem and sell the solution to the company

Need to figure out how to spend money in the engine to generate more than proportionate sales. Sales Pods proposed winning by design. Individuals from sales and marketing functions that are depending on each other and grouped together as a team. Around 35K per month to build out a sales pod. Growth rate doubled.

Yosiat Gimbernard, Odoo

Presentation format

  • Describes the difference between traditional ERP and single use case apps.
  • EPR has high implementation cost. Single use case apps are all over the place
  • Describes the pain of managing all the single use case apps.
  • Focuses on product and usability
  • 150,000 companies using Odoo

Roland Ligtenberg, Housecall Pro

The Viral evangelism loop characteristics. Always ask them how they hear about the company?

Once you have a base of users that are interacting more frequently with you, do start thinking about how to implement the evangelist program.

  • buys product
  • loyal customer
  • helps you find other customers
  • and helps find other evangelists.

Components

Written component
  • Title of program
  • Who we are targeting
  • What they need to do to qualify
    • needs to be objective / quantitative
      • 100% profile complete?
    • challenging but not unobtainable. Only the top 10% can qualify
      • minimum 15 reviews with a 4.5 star average
    • hijack the endowment effect
  • Why should they do it
    • exclusive. Its earned and not bought
    • priority access
    • generate status
    • make sure you are listening to them and show them respect
    • make sure you respond fast
Visual component

A soldier will fight long and hard when given a piece of ribbon. Give me enough medals and I will win the war.

  • Need to give them a badge
  • recognition
    • offline: see them face to face so things are more impactful
      • example
        • meetups
        • events
        • Conferences
        • Tradeshows
      • mastermind events
      • recognized in front of their peers
      • small little tokens make it feel real
    • online
      • internal and external communities
      • FB groups
      • Forums
      • Directory
      • Spotlights
      • Case studies
  • Create assets
    • makes it easy for them to brag
    • leverage curiosity to increase virality
    • allows for easy to reuse
    • physical User certificates that is hand signed.
      • they build shrines?
    • give them Stickers they can put on their physical accessories
      • their customers see it
      • their competitors see it
    • Create Facebook and Instagram content they could reuse

Ashley Whitehurst, Syndicates Launch

The investment funnel

  • Online/Written Content
  • In-Person Education
  • Accelerator
  • Syndicate – funding size 100K – 650K
    • Lead
      • 20% carry
    • Backer
      • well connected high network individuals
    • Startup

Syndicates are useful for closing the current round. Flexible investment amount.

Keeps your Cap table clean.

 

  • Fees range from 10-15K so if lower than 250K not suitable
  • Too slow 1month to close
  • If privacy is an issue then don’t use it.

Minimum viable metric

  • has syndicate lead
  • investors lead for the round
  • 50%+ of the current round closed
  • 18-24 months of runway
  • 50K MRR w/50%+ Mom Growth
  • 10,000+DAUs w/5% + WoW growth

Due diligence

  • P&L
    • not tracking revenue
  • Org chart
  • Cap Table
    • Lack of vesting schedule
    • Founders is fully vested
    • Dead weight on the cap table – owns more than 10% of the equity that is no longer contributing
    • founder is the only full time employee
  • Detailed bank statements
    • low bank balance
    • paying personal rent out of the company
    • slow growth
  • Founder Q&A via webinar
    • 70+ investors
    • Need a FAQ documentation
      • 30% about product
      • 25% about performance

Why syndicate investors are passing

  • usually just invest in the founder
  • lack of moat
  • valuation is too high
  • market is not too big
  • not part of his investment thesis

The wire and sign for banks it a painful process. Vacations and burning man get in the way.

Investor qualification

  • making more than USD200K per year or
  • asset has more than USD1million

Aileen Lee, Cowboy Ventures

Worked with Mary Maker who is one of the world’s class research analyst. The willingness to have conviction and willingness to standup on what you think when no one else believes it. The early believer of Amazon.

Current trends

While software is eating the world. A lot of the companies that do not have profit margin structure of software companies are being invested as if they are software companies. WeWork is one of those classic examples. Its becoming hard to raise money for businesses and for certain people. Ratios will collapse.

We are in major tech trend right now. Priorly was social which made marketing easy. Cloud, SaaS and mobile made it easy for people to dislodge competitors. These trends are around 15 years old already. Investors are always ready to deploy cash.

War chest strategy

Real Estate Tech was an up and rising trend which allowed the ability to deploy capital. There is too much money chasing too little opportunity. WeWork has something physical so it feels easier to value, aka real world virality like Uber.

For 5 to 10 years the ecosystem has been in this war chest strategy paradigm. Investors invest in growth. They were willing to fund 20% growth  versus 10% while burning more. It pushes the founders to take the money and promise the moon or blow up trying.

The risk is asymmetrical between investors versus founders and employees, since investors just need to make sure one company makes it while the latter group are all in.

Slow and steady growth

The slow and steady growth examples. Founders firmly believe their products are differentiated and don’t want to pretend to be something they are not.

  • PagerDuty
  • DatatDog

Choice between these two tracks is based on personality of founder and investor expectation.

Due to the prevalence of war chest strategy the environment has became really sharky.

Dollar shave club

What is the biggest risk and who can address the risk. Micheal the cofounder was able to address the risk for the consumer digital marketing company. The category was open for disruption due to the way its currently being sold. Razors were easy to ship. Patents were expiring.

Mindset

Just find one or two of the right investor to invest in the company. Don’t have to waste time listening to how other founders are killing it. Just focus on the batting average.

Need to have a unique insight into the market or a technology twist. A lot of the markets are well understood.

Lack of diversity in the VC

Most funds right now are private and very small.  Most VCs don’t have friends who are not white and not male.

The easiest way to fix the problem was to start her own firm. She was a venture backed CEO. Sales reps report progress and attend a lot of meetings but didn’t close.

Lots of people rejected her while raising money for CowBoy ventures. Most have never invested in a single founder and single GP fund. The three funds are from the same set of LPs so not much need to look for new LPs.

White men are hired on a promise and women/minorities are hired from the past.

Founders need to consider how they signal the market to change this trend.

Lipsyncing

Hiring female partners who don’t have cheque writing ability.

Macro economic trends

Concerned about our industry taking money from Saudi Arabia

Investor assessment criteria

  • tight presentation
  • founder understands product and market
  • Clear revenue model
  • huge potential market

Guillaume Cabane, Growth Advisor at G2

Key to success product and distribution

For distribution, create a distribution moat.

Distribution channel saturation.

Google CTR is dropping

Facebook has finite inventory. Cost per click has increased by 50% within the past 5 years. Not going to be viable comparing against LTV of customers.

Move beyond average. Forecast the value of each customer in the funnel and choose the right acquisition approach.

  • Self service
  • Enterprise
  • Budget per lead

 

Levels of influence in a purchasing decision

  • business colleagues
  • community
  • marketeer
  • sales person

outbound emails need to inject personalization by using their logo, their font, their screenshot.

Use clearbit to predict who is coming to the site. If potential high value customer make chat available. Drive engagement to hijack reciprocity.

Create an engagement that is cheap, qualified and memorable.

If selling complex product, remove pricing to avoid anchoring which makes it hard for sales people.

Test different UVP with very different valuation.

Enterprise B2B hard to use Facebook. Send data back to Facebook to train their ML ad model using our forecast.

Once converted users to dollar, then instead of tracking number of people converted then track how much dollar converted.

Nate Smith, CTO Lever

how to hire people?

Don’t write job description. It’s useless. Candidates just ignore them. Write the impact overtime. 1 month, 3 month and 1 year.

Hiring the candidates for roles once you understand. Helps interviewers evaluate

Saves time.

What they will own. What they will teach. What they will learn.

Really need to horn your pitch and track them via a  CRM. Keep selling them the culture. Make sure to chat verbally before providing a written offer.

Sara Deahpande, Maven Ventures

Levers to optimize funding round

speed:

process is in your control. Leverage momentum. Keep the investors informed in the process. You are always raising.

investor fit:

individual partners and firms reputation/brand as a working partner. stage and sector focus for the investor. chemistry

size of round:

start with how much you need. What milestones you will hit and how long that runway will be.

valuation:

make sure not too high otherwise will be hard to justify the valuation of the next round. They might have ownership level requirements and how much they need to deploy

Example

10% ownership at seed

20-25% ownership at A round

Trade offs.

valuation versus investor fit. Round size vs valuation. Speed versus valuation.

The success of the underlying business is the most critical criteria to even consider raising money.

VC operations

Assuming 50 million USD fund.

Timelines
  • First 3 years to deploy
  • 10 years to generate returns
Fund allocation
  • 20% for operating costs and fees (USD 10 million)
  • 40% reserves for follow on rounds (USD 20 million)
  • 40% for writing initial checks to spread over 20 companies to generate yield for LPs. Aka USD1 million each. (USD 20 million)
Payout
  • LP expect 3X returns on the original 100% investment
  • 20% carry on returns
Industry benchmark

A strong return of an upper quartile VC firm for USD50 million injection will return 175 million which is 4.4X returns.

viable exit scenarios

Scenario 1 for USD50 million returns

  • zero dilution
  • 500 million exit
  • 10% ownership

scenario 2 for USD50 million returns

  • 50% dilution,
  • USD1 billion exit,
  • 10% ownership