American Software Exceptionalism

If you regularly read my blog (and these days who doesn’t?), you have noted a distinct bias towards discussion of American-headquartered software companies.  In fact, “bias” may be too weak a word.  I’ve only written a handful of posts (out of more than 90) about non-US-Headquartered companies.

Why this bias?  Plain and Simple.  Foreigners do not know how to write exceptional software.

Just kidding!

My bias, one common to US software folks who have spent too much time in Silicon Valley, exists because:

  • I don’t even know what the right publications are to read from Europe, Asia, or the BRIC countries.  (And unless the publication is in English or high-school level French with lots of pictures, I won’t understand it anyways.)
  • Many US PE and venture investors typically invest only in the US, so they are of no help in identifying interesting companies
  • Many of the small companies I work with are so busy trying to conquer a gigantic market here, that it does not make sense for them to worry about the proverbial ROW–rest of world–quite yet

Despite this bias, there are markets where non-Americans are leading the way and/or tied for the lead.  Examples include:

  • Supply chain finance where the UK is a hotbed of activity, due to long UK payment terms and the UK government’s involvement in the issue
  • Corporate social responsibility and environmental supply chain management which seems to be more important in Europe (as social welfare generally is) than in the US
  • Retail and private label related software due the presence of the behemoths in that sector in the Eurozone
  • E-invoicing in the Nordic countries and e-payments throughout Europe

I’m quite sure I’m completely ignorant of other B2B areas where the ROW is kicking our proverbial you-know-what.  I invite the non-US resident readers to make suggestions on interesting B2B companies or trends coming from elsewhere in the world.  If I can, I’ll research and write about them.

Note to my Canadian friends (you know who you three are):  I’m sure Canada is ahead in some areas not related to hockey and maple syrup.  Feel free to chime in.

A TV Shark Wades into the E-Procurement Waters

I was interested to read that famed “Shark Tank” investor and NBA Mavericks owner, Mark Cuban, invested in a company called Procurify.  The press release describes Procurify as follows:

Procurify is a fully-featured, cloud-based procurement software solution that can be used to manage both direct and indirect company spending, while providing control and visibility of where company money is going in real-time, using simple-to-generate reports and analytics. Procurify.com is a trusted global technology brand, dedicated to simple, innovative, sustainable and cost-effective enterprise solutions.

 

Not exactly earth-shattering stuff.  The Procurify website is beautiful, but nothing truly earth-shattering there either.  The site does seem to indicate that the target client for Procurify is an SMB.  The most interesting aspect of the site, however, is the transparency of the Procurify pricing model, which is prominently displayed at $45 per user per month:

 

2014-04-18_0-00-18

I applaud this transparency and wondered when this approach might come to e-procurement, as it has to CRM, T&E, cloud storage, google apps, supplier credentialing, and many other B2B SaaS categories. There is, however, one problem–the Procurify price seems really high.  Expense reporting apps start about $8 per user per month–with users submitting about 2 expense reports per month.   Is procure to pay worth 6x that amount? Do Coupa, Ariba, Sciquest, etc, get $500 per year per user for procure to pay? I’m not sure, but I do not think so.

I hope I’m wrong.  I really do love the simplicity and transparency which is a underestimated aspect of true SaaS offerings.  I fear though that Mr. Cuban may need to do a little tweaking to this one.

 

Two tell-tale signs the Tech Bubble is popping

The NASDAQ finished last week down 8% from its early March high.  Not quite yet an “official”, 10% correction, but close.

Calling bubbles is notoriously difficult, but I propose two additional signs that the bull-run in tech stocks is over.   For me the beginning of the end of the last bubble was marked two basic themes that are now recurring:

  • Venture Investment in food and grocery delivery services and
  • Tech company commitments to gigantic real estate projects

Let’s start with the Grocery Delivery Bubble Indicator, or GDBI as I will call it henceforth. We Americans are fat and lazy.  The tech bubble investment theory goes that if we could, we would sit on our couch and order items from the grocery store with a magic wand. During the last bubble, the GDBI peaked when the geniuses behind Webvan began building their warehouses to alleviate the pain of shopping.

In the last couple of weeks, the GDBI seems to be peaking again with GrubHub, Amazon Fresh, Amazon Dash, Blue Apron, etc.  When venture investment starts pouring into the expense categories folks are least likely to need to buy online, it’s a sign of a frothy world. Take a look at these charts from Business Insider.

foodandbeverage

 

retail

As to the high-profile real estate deal bubble indicator (HPREDBI?), during the last bubble several Silicon Valley companies made questionable real estate decisions committing to gigantic leases that crippled their companies (I’m not naming names).  I’m no expert in SF real estate, but the news Friday that Salesforce will lease more than half of the tallest building to be built in SF (by 2017) reminds me of “Rome before the fall” type moves that I saw in 2000.  This part of the news report especially caught my eye:

The cloud-computing company will pay $560 million over 15 1/2 years to lead developer Boston Properties for 30 floors at Mission and Fremont streets.

The deal for 714,000 square feet marks the biggest corporate lease in the city in recent memory, outstripping J.P. Morgan’s 650,000-square-foot site on Mission Street in 2000. (my emphasis added).

Robert Shiller won a Nobel Prize, in part, for his work on bubbles in asset prices. I think my GDBI and HPREDBI may be destined for the same type of fame. ;-)

Of course, I am saying all of this with tongue planted firmly in cheek, but it does seem these days that anything that can be:

  • sold in the cloud,
  • as a subscription,
  • and delivered same or next day

can raise a ton of money–Legos, meal assembly kits, groceries, shaving supplies, and man wipes are examples.  I’ve already suggested we add pets and significant others to this list. I’m not sure what else is left.

Fundbox: A new player in supply chain finance

When I saw the announcement today that there is a new player in B2B supply chain finance –that is linking specific invoices to cash advances– I thought “Wow, how many companies can go after the same market!”  After all, invoice networks and pure play supply chain finance providers are teaming up all over the place:

  • OB10/Tungsten
  • Basware/Mastercard
  • Ariba/Discover (sorta)
  • Taulia and Somebody
  • Tradeshift and Capital Aid
  • Oxygen Finance, C2FO (dynamic discounting)
  • Prime Revenue, Orbian, Demica, and others
  • Banks and their technology providers
  • Not to mention P-card providers and
  • Not to mention specialized providers like Cass, PowerTrack, Fast Pay, etc.

But when I looked at Fundbox a little closer, I realized that it is going after an interesting niche in this market.  Specifically Fundbox seems to be targeting small services providers, such as accountants and freelancers.  This is a market the major providers are not too eager to pursue, that has no hard collateral, and that is not easily suitable for P-cards.

Based on the website, Fundbox looks pretty slick.  Fundbox appears to integrate quickly with Quickbooks, Freshbooks, and Xero and aims to make it easy for small businesses to load their invoices and essentially sell the receivables they choose to.  (I’m not sure if the legal structure is a receivable sale, but it seems like it.) Fundbox claims to use algorithms, historical data, and public data to assess risk automatically in under a minute.

Based on the website, Fundbox appears to lend by taking a 5-7% fee, as opposed to p-cards which take a 2.5% discount.  But Fundbox gives the borrower a three month installment plan to pay back the advance.  (Figuring out the effective APR would hurt my brain, but it’s probably similar to p-cards for net 30 terms)

Fundbox raised $16.5 million in their series A round from a list of A-players:  As the press coverage states:

 The round was led by Khosla Ventures, with investors, Vikram Pandit, the former CEO of Citigroup, Tom Glocer, the former CEO of Thomson Reuters and Jay Mandelbaum, the former Head of Strategy & E-commerce at JP Morgan Chase also participating, among others.

 

The small business financing market, especially factoring, is an example of a market that is being disrupted through use of automated transactions, granular lending, and big data. Whoever builds the best risk assessment model and on-boarding process will have a great business.  The Fundbox team joins a lot of smart people trying to figure these two challenges out.

Small Businesses in a Cloud Box

As a very small business owner and consultant to start-ups, I am constantly reminded that for certain small, simple, businesses it is becoming possible to have just three or four cloud IT vendors help you run an entire business in a pretty sophisticated way.

  • You can have a cloud telecom provider (Ring Central, Cbeyond, and many others) or the dreaded B4B from Comcast Business for basic services
  • Google docs is easy if you need “Office”-like apps or you can use Microsoft 365
  • An accounting package from QuickBooks, Xero, or other cloud providers does the trick on the general ledger
  • A vertical-specific application that spans from front-office (sales and marketing) to back office administration rounds out the platform

It’s these latter applications that are still being developed, but are coming together from folks such as:

  • DealerTrack for auto dealers
  • Clio for small legal offices
  • Schedulicity and others for personal services providers
  • Eved for destination management companies (Full disclosure, I am on the board at Eved.)
  • MindBody for yoga studios, spas and salons
  • Too many companies to mention for the gym space and independent hotel space
  • Cloud POS systems for restaurants
  • Fonteva for associations

At worst, you might need 2 or 3 of these vertical vendors, in some markets, to cover the front office and the back office.

It takes a little work to make this “cloud business platform” function seamlessly and to fully execute online marketing, but it is becoming easier and easier.  There has been a lot of focus in the tech community these days on how much easier it is to start a software company, but this phenomenon is extending to all sorts of other businesses.   (Add to this the greater ability for entrepreneurs to get healthcare and it seems the risks and costs of start-ups continue to drop.)  It’s great for entrepreneurs, investors, America, the world, and perhaps the galaxy.  Okay, I got a little carried away, but is exciting to see how far one can now take a business idea before needing a major investment in IT.

Did Nasdaq’s drop last week scare you?

Nasdaq’s 2.6 percent loss on Friday followed a nearly 1 percent slide on Thursday and put the index more than 5 percent below its closing high for the year, which was set on March 5.  If this caused you to freak out, I have two words for you:  greedy bastard. ;-)

Were you expecting an inexorable, never-ending rise in valuations?  Perhaps you thought that the best IPO quarter since the same period in 2000 was just the beginning?  Perhaps you also convinced yourself that Candy Crush was fundamentally different from Zynga (see below)? (By the way, I’m not sure what either of them are!)zynga

The cloud has fundamentally altered the economics of many businesses–especially software, but how many companies can make money on mobile games?  Is one hit game really a “moat”?  Is online food delivery that defensible (GrubHub)?

I’m not chicken little calling that the sky is falling, but it certainly looks like a great time to be a seller and a little dicier to be a buyer.   As the “Most Interesting Man in the World” might say, “Stay selective my friend”.

 

 

Flash Boys, Exchange Ownership, and Rules

I haven’t read Flash Boys by Michael Lewis yet, but I will.  After all, any guy who wrote Liar’s Poker, MoneyBall, The Blind Side, and The New New Thing deserves another $15.00 from me.  Lewis consistently delivers insight and amusement.  (For me, Malcolm Gladwell is a pretender; Lewis is the king.)

I am blissfully unencumbered by any real expertise on this issue, but after watching the 60 Minutes interview and this fabulous debate on CNBC Tuesday, I have come to a couple of conclusions on the matter of high frequency trading and exchanges.

1.  Everyone agrees electronic trading has made markets/exchanges far more efficient. Bid/ask spreads are demonstrably lower  than 10 years ago and any individual trader can pay $8.95 per trade for something that used to cost $100 or more in 1982.  On an inflation-adjusted basis, this efficiency cannot be beat.  No arguments on that issue!

2.  There are exchanges, such as BATS, that seem to offer a business model which includes selling differential access to information based on the speed of connection to the exchange–or at least these exchanges allow participants access to trading information at different speeds. Many of the companies who prefer this model also seem to also own shares in the exchange. This may be legal and may be even be readily evident in the fine print of these exchanges.

No one said anything about this arrangement, until now, because:

  • it is complicated
  • in most markets we expect service providers to competing on speed!
  • people are inherently lazy about reading fine print
  • it involves tiny extra fees on huge volumes
  • and there is a collective action dilemma (i.e., it is not in the interest of any one participant to figure out the implications of these rules)

As a result, it took a while for this speed-based business model to come fully to light and for people to start to evaluate its “fairness”. (Some observers believe this business model is inherently illegal, but I am not qualified to determine if the information high frequency traders had before others (for split milliseconds) constituted material, non-public information–or simply the free-market in action. Meaning that folks who invested in faster access were rewarded for their risk taking.)

3.  The guys behind Flash Boys/IEX have set up their own exchange which has slightly different rules and does not allow speed of access to be a variable on which participants can take positions or gather information. Not surprisingly, this exchange is owned by, and frequented by, the folks for whom this is a better pricing mechanism–buyside players.

Why do I write about this?  Because all exchanges and B2B marketplaces have rules of participation, different pricing mechanisms, and even possible subsidizations.  It’s not surprising, for instance, that bank-owned payment networks funded their system with merchant fees. It’s also not surprising that many buyer-owned consortia charge suppliers and supplier-owned consortia choose to charge buyers.

Because so much of American wealth is tied up in equities and equity markets have recently been subject to bubbles, flash crashes, Ponzi schemes, and insider trading scandals (e.g., SAC), this issue of “fairness” for the little guy is highly sensitive and politically charged. In B2B, we can step away from some of this sensitivity, and focus on what is really important –which is that exchanges and platforms need to be clear on what they charge, how they charge, who owns them, and how they intend to use the data they gather. Various providers in procure to pay networks, for instance, still have completely different pricing models.   As long as these networks are clear on their business models and they compete transparently, everyone wins.

BATS’s CEO basically said on CNBC that IEX simply had a different business model than their exchange.  He really only objected to IEX calling the BATS approach “rigged”, thereby disparaging them, as opposed to just saying BATS has a different business model.  The BATS CEO is also clearly insanely jealous, I’m sure, that his new competitor is getting record-breaking free publicity in the form of a book by one of America’s most successful authors to launch his business!

It looks to me as if the bottom line is that BATS was never fully transparent on how it worked and now they being badly out-marketed.  Every exchange from Ebay to the London Metal Exchange has faced issues with respect to fairness, speed, ownership, etc. Communication and sensitivity are critical.

By the way, I’m optioning the rights to the Flash Boys movie.  I’m not sure it will rake in as much as Lewis’s other hits such as The Blind Side or MoneyBall, but that CNBC debate is pretty entertaining stuff.