A Crypto Future for Good

Crypto-Currency

Recently the BBC featured this article about a new bit-coin derived service that rewards walkers with a virtual currency for each 5 miles they walk. Bit-coins are not new, but this is the first genuine attempt to connect crypto-currency to a genuine real world cause. With obesity on the rise and the follow-on problems with diabetes, this kind of initiative is welcome.

My own personal interest in crypto-currency (CC) goes back a couple of years. I've managed to mine a few bit-coins, have delved into the block-chain to see how they are created, watched the valuation of each coin fluctuate wildly and completely failed to find anything that I really wanted that I could use the bit-coins for. 

I have throughout all this been telling anyone who would listen that CC's as a concept have the potential to change everything. Particularly for people with little or no specific skills base or those people that work in sectors that are historically low paid (healthcare etc.) 

Imagine scenarios where putting rubbish in a bin creates revenue? A Nike Fuelband style device on your wrist communicates with a recycle bin to reward you for depositing rubbish. Now suppose that multiple deposits in a time-frame amplifies the reward. As soon as rubbish has a value you'll never see litter in the street again, or anywhere else for that matter - I've said that for years.

There are a lot of social and societal issues that could be tackled in the same way - with CC's rewarding low/no skilled input into society, providing a revenue opportunity for the person and lessoning the welfare/local authority bill in the process. 

So what's the problem?

There are a few issues with CC's at the moment. 

- Stability
The current CC's suffer from a stabilising influence like the Bank of England does for Sterling. Our money is protected from volatile movements by the Bank of England's moderation of the market. Bit-coins have never had this and therefore are subject to wild swings in value.

- Security
CC's need to be deposited into a virtual wallet system. I've never seen my bit-coins, they don't exist physically, I know they exist because I can see them in my bit-coin wallet. The wallet system is not 100% flawless and its still possible for wallets to be hacked or stolen completely. They also rely on passwords and if you lose or forget your password there is no system to recover it, its lost for good.

- Market
At the moment most of the mainstream business environment doesn't want to deal with CC's, mainly for the two reasons above but also because they don't have the skills and tools internally to deal with CC transactions. Its changing slowly and some of the banks are heavily investing in the people and tech they need to manage CC's. However, its still not possible to pay your phone bill with a CC transaction - which is a major limitation.

- Trust
For anyone wanting to get involved with CC's there are still trust issues for something that you can't hold in your hand. Users need to know that they are going to receive what they have earned, when they earned it and that they can spend it the way they want to. There still needs to be some formality developed for CC users - CC generators need to be regulated and managed (maybe by the FSA?)so there is some faith with the users that they are involved with something that's going to function correctly.

Summary

I'm an advocate for the future of CC's. I don't think that bit-coins are the solution, but something based off the block-chain principle will emerge that starts the revolution. If you're interested in CC's and want to read more, here are a selection of links outlining both the argument against as well as for CC's.

Wall Street Journal
Nature.com
UK FinTech
Investopedia
City AM

Is the Bubble Ready to Burst?

A non-tech investor recently asked me if I thought the tech market was heading for a crash. "Yes" I replied without hesitation. 

The current tech market and environment has all the warning signs of a crash coming, its just a question of if we choose to get ready for it, or ignore it on the basis that there are still gains to be made right up to the moment it goes bang. It isn't the same as the dot.com burst of the late 90's but the same signs are there and a large part of the tech market seems happy to ignore what's on the horizon.

A combination of rapidly increasing share prices, market confidence that the companies will turn future profits, individual speculative activity in shares, and widely available venture capital has created an environment in which many investors were willing to overlook traditional metrics, such as P/E ratios, in favour of basing confidence on technological advancements.

So what am I basing my future prediction of a tech-bust on?

The current "Unicorns" need to go public to provide their investors with a return on that investment and keep confidence in the market. A small number could be sold but at a certain top-line valuation this is particularly difficult - there aren't that many buyers. The Unicorns are growing revenues very aggressively which is a positive but the question is more over their ability to generate a profit. They are raising new monies constantly and burning most of the money to maintain the growth curve. Ultimately they will need to show a path to baseline profitability with attractive margins to justify their valuation. Sceptical doesn't describe it with me, I'm sure that a lot will not end up being sustainable and its at that point that the confidence will collapse.

Many Unicorns - darlings of the stock market - and other privately held companies will be shutting their doors as they find it impossible to raise more cash with their bloated capital structure and their huge infrastructure costs. Any smaller or more nimble company that can actively cut costs to get at or near profitability will survive but many will not.

I still think that the best way to understand the current situation is to hark back to the last downturn. Mark Cuban (His Broadcast.com company sold for $5.7 billion several months before the dot-com bubble burst) recently said that there is no question whatsoever that we are in the midst of another one. The key piece of learning from the last one? There is no doubt that a lot of people will be devastated when it pops. 

“The biggest of all losers will be anyone who has borrowed money to invest in private companies,” he said. “You were stupid. You blew it. You lost. That simple.” - Mark Cuban

A Perfect Storm?

Absolutely. The start-up market is overheating.

Funding a tech start-ups has never been this easy! One of the prime causes has been because of mutual funds and hedge funds getting in on the action, altering not only the funding landscape for tech start-ups, but also the equation by which valuations are created and therefore expectations.

The concern is really around the valuations for businesses that are defying explanation and negating the established wisdom. Entrepreneurs and investors are deviating from more traditional valuation methods and performance metrics to more radical ones. Another cause quoted for increasing valuations is the trend of protections for late investors that cause valuations to inflate further. These conditions have put the market into a state of very inflated and artificial valuations.

The companies themselves are burning through cash like there is no tomorrow. Throwing money at every aspect of marketing, infrastructure and, in particular, salaries has become the accepted investment strategy for start-up growth - everyone wants a Unicorn. All this perpetuates the vicious cycle of raising more money and spending more money. For the amounts that some of these businesses have raised, there is extreme scepticism on actual profitability.

Where does this end?

As to if the unicorns are in some kind of tech-bubble - I'm not sure. There is so much money vested in their success its likely that more money will just find its way into their eco-system. I'm hesitant to say to-big-to-fail but close. Companies further down the scale are very likely to fail if confidence falls, new money will dry up or only go to the unicorns. Confidence is everything when it comes to investing.

In any gold rush the people who make the real money and the people who build the picks and shovels. A lot of the infrastructure providers have had a long stretch of capacity development through overspending by VC backed companies. They are the real winners.

Pitch Perfect

I've just attended WebSummit 2015 in Dublin. Its one of the largest gatherings of start-ups, investors and business angels during the year. Attendance is typically in the 20k bracket and its a popular event with celebrities such as Bono from U2.

This years event included several live pitch stages where anyone could stand up and live pitch their start-up directly to a group of investors in front of an audience. One of the pitch stages was sponsored by Audi and I watched a number of start-ups pitch during the course of the event.

For a lot of the people using the pitch stage, it didn't end well. We saw a succession of young hopefuls go down in flames under the weight of badly thought of ideas, unworkable business models, rampant ego's and twisted understanding of how investment works.

Anyone who really understands how investment works wouldn't get up on one of the these stages because they understand the damage that a bad pitch or a bad investor reaction to a pitch can be.

Let me just quantify that slightly.

- A bad pitch is an unrealistic, non-commercial or niche idea that has no audience or is unlikely to monetise itself.

- A bad pitch reaction is when you pitch to the wrong people, investors come in flavours and you need to find the right audience for your pitch. Pitching to just anyone who identifies themselves as an investor will ultimately lead you to a bad pitch reaction.

So what makes a good pitch and what is the right scenario to pitch in?

Creating a quality pitch deck takes time and expertise. If you're a first time entrepreneur then get help. Accountants and lawyers are the first port of call and then subject matter experts can all help you get the right vernacular. The slides must be accurate and succinct and must cover all the right aspects that the potential investor will need to know to understand if this is an idea that appeals to them.

Simply:

1. Who are you / who are the team

2. What is idea / problem you're solving

3. What is the solution your developing 

4. What is the revenue model / who is the customer

5. What is the cost of developing the solution

6. What is the time-scales / time to market / 1st £ of revenue

7. What is the exit strategy / Time to exit

At the end of this the investor should be able to rule you in/out of their thinking. They either understand what you're saying, like it and want to continue or they don't get it and you both need to draw it to a close and move on to the next opportunity. 

Based on watching the Audi pitch stage at WebSummit, this is what you cant do:

- Tell the investor they're wrong when they play devils advocate
- Dismiss pertinent questions
- Speak negatively in response to a potentially negative point
- Not look directly at the investor whilst being challenged
- Clearly make things up on the spot to negate a question
- Be anything less than accepting about the advice your given

I watched a number of people pitching just fail to deal with the questions from the panel after their initial pitch 4 minutes went reasonably well. The questions are a pre-cursor to a formal period of due diligence and the investor can judge your proclivities, quirks, attitude and personality as part of that due diligence process. 

There are a few things I can recommend as part of the post-pitch questioning:

- Only use positive language - I am, I will, I can, I accept
- Avoid negative language - I guess, If we're lucky, Maybe
- Look at the person who is asking the question directly, not your feet
- If you don't know the answer, tell the investor you will contact them later with the correct information
- Ask questions back following an answer to a question. "The answer to the question is X, is that an answer that is acceptable or meets your investment requirements?"

Summary

There is a school of thought with pitching that "less is more", its something I agree with. Many pitches get way to technical and detailed. I think that 5-8 slides is enough with 1 minute per slide. You should then be engaging with the investor directly opposed to broadcasting to them. Use the discussion as a part 2 of the pitch. Its pretty impossible to secure the deal in the pitch but its very easy to lose the investors interest so the pitch and the audience must line up perfectly, the pitch itself must be meticulous and the delivery must be well rehearsed and optimal.