My Interview With Bloomberg Markets

October 8, 2014 / / No Comments

Bloomberg Markets was nice enough to publish an interview with me this week, mostly on finance and banking topics. Since the interview is correct but abridged, took place in early April, and is just coming out now, I offer a few additional thoughts.

Unbundling banks: I think banks are getting unbundled with or without Silicon Valley or Bitcoin due to market changes plus regulation.

Any big bank executive will tell you: Over time, the ratio between what non-banks can offer vs what banks can offer is steadily increasing. Post-crisis reforms like Dodd Frank are accelerating the unbundling, whether that’s what regulators intended or not.

But Dodd Frank is a double-edged sword: It also makes it harder for new entrants to the core banking system. Banks both protected and restricted.

Bitcoin and regulation: Since the interview in early April to the present, there’s been substantial movement by many regulators on Bitcoin. There are plenty of discussions and disputes between market participants and regulators but overall, I think a lot of progress is happening.

Finally, much like the Internet 20 years ago, Bitcoin as a technology can and will be adopted by both incumbents and new market entrants. We are seeing a rapidly escalating level of engagement and interest in Bitcoin and cryptocurrency by large financial services companies. The opportunity is clear and present for both big companies and startups to use new technology to improve financial services broadly.

Since the interview, the other huge earthquake to hit the financial services industry is the launch of Apple Pay. Between Apple Pay and Bitcoin, I predict more changes coming in financial services and banking in the next 3 years than in the last 20 years.

Source Tweets: 1,2,3,4,5,6,7,8,9,10,11,12,13

Common Fallacies About The Valuation Of Public and Private Technology Companies

April 17, 2014 / / No Comments

First, ask any MBA how to value tech companies, she’ll say “discounted cash flow, just like any other company”.

Problem: For new and rapidly growing tech companies, up to 100% of value is in terminal value 10+ years out, so the discounted cash flow framework collapses. You can run as many discount cash flow spreadsheets as you want and may get nothing that will help you make good tech investment decisions. Related to the fact that tech companies don’t have stable products like soup or brick companies; future cash flows will come from future products. Instead, the smart tech investor thinks about:

  • Future product roadmap/oppurtunity
  • Bottoms-up market size and growth
  • Talent and skill of the team.

Essentially you are valuing things that have not yet happened and the likelihood of the CEO and team being able to make them happen. Finance people find this appalling, but investors who do this well can make a lot of money, but spreadsheet investing is often disastrous. It doesn’t mean cash flow doesn’t matter, in fact the opposite is true: this is the path to find tech companies that will generate tons of future cash.

Corollary: For tech companies, current cash flow is usually useless for forecasting future cash flow, a lagging not leading indicator. This trips up value investors (Prem Watsa!) all the time; tech companies with high cash flows often about to fall off a cliff. Because current cash flows are based on past products not future products and profitability often breeds complacence and bureaucracy.

Always, always, always, the substance is what matters: WHO and WHAT. WHO’s building the products and WHAT products are they building?

Brand will not save you, marketing will not save you, channels will not save you, account control will not save you. It’s the products. Which goes right back to the start: Who are the people, what are the products, and how big is the market? That’s the formula.

Source Tweets: 1,2,3,4,5,6,7,8,9,10,11,12,13,14,15