Gravitas Spark CrowdFunding

Author: Gary McCarthy

  • Making America Great Again – Was Trump Necessary?

    Making America Great Again – Was Trump Necessary?

    Donald Trump’s signature slogan “Make America Great Again” would suggest that the world’s foremost sovereign power has suffered a dilution of its global influence.  Not for the first time, a pillar of Trumpian policy may not reflect actual reality.

    As recently as 2006 US companies’ market share of the operating systems(OS) which power mobile technology struggled to reach 10% globally. Today that figure, thanks to Apple’s IOS and Google’s Android, is sitting comfortably over 99%.

    Yes, private enterprise in America totally controls the functionality of perhaps the most revolutionary consumer device in the history of the planet.  The mobile phone’s ability to empower individuals to engage in media, finance, retail, education, travel and even health care activities is a concentration of consumer influence beyond the dreams of business 25 years ago.

    And, to this writer, the development of such market power, rather than the 1991 collapse of  the USSR,  marks “Peak U.S.A” .  Then again, that might have changed this week.

    In response to proposed US government sanctions against Huawei, the giant Chinese mobile company, Google has warned that Huawei mobile phone users may lose its operational support for its Google Maps and YouTube applications.

    Early financial market reaction focused on potential commercial damage to technology suppliers to Huawei and potential retaliatory action from China against the likes of Apple. Clearly, this US government initiative cannot be unrelated to the ongoing trade war/negotiations bewteen the world’s two largest economies.

    Irrespective of an ultimate trade agreement between both nations, this development should serve as an uncomfortable reminder to businesses and other countries that there are concentration risks associated with U.S. domination of the global OS ecosystem and the potential loss of valuable customers who fall foul of a somewhat erratic U.S foreign policy.

    Ironically, the populist backlash against globalisation led by Donald Trump could reverse peak global power for business interests in America.  This has implications for Ireland too.

    The consistently excellent commentary by John Kennedy on the Irish tech scene in Silicon Republic recently highlighted Ireland’s critical positioning as the place where companies with global ambitions tend to concentrate their scale-up efforts. He puts it well here –

    “Ireland has cultivated a crucial role at the heart of the global tech and internet world as the place to do business and hack growth.

    As Brian Halligan, co-founder of HubSpot, put it once, Dublin is seen in leadership circles as the scale-up capital of the world.  When Google came to Ireland in 2003, it was as a sales outpost for a handful of Googlers. Today, Google employs about 8,000 people here and is growing across a plethora of roles and functions, including sales and engineering. Similarly, Facebook came to Dublin in 2008 with a small outpost in mind and today it is hurtling towards 5,000 people. If you study companies such as HubSpot, which last year surpassed the 100-engineer mark in Dublin, it is clear that engineering is moving closer to the sales function because it is vital that products and actual customer success stories occur thanks to greater empathy by the people who make the products as well as those that sell them”.

    There is a danger that there are countries and companies watching developments from a strategic perspective and begin to put in place plans to reduce exposure to U.S. technologies.

    Ireland as a scale up base for companies could also be perceived as having an unhealthy dependence on investment from America and….. goodwill. Dublin’s political ability to take a principled stand on foreign policy initiatives is rather limited and in this upside-down Trumpian world it is difficult to know who actually is currently a U.S. political ally.

    Indeed, it has always seemed a little strange that the U.S. spends more on its military than the next 12 ranked countries combined – ten of whom are American allies!

    Now, former friends watch nervously as a succession of authoritarian leaders parade through the White House accompanied by fawning praise from the Donald.

    The global reality is that American power and influence through its technology and military has never been higher. It’s weaknesses are captured by any quick analysis of long-term domestic/social trends in health, education and income inequality which have triggered a flawed political backlash against globalism and the technological hegemony it currently enjoys.

    The Huawei story has possibly let the genie out of the bottle and given businesses pause for strategic thought.

    A reversal of U.S. dominance in technology and a de-risking by companies of concentration risk could have negative impacts on previous scale-up plans and development costs as companies factor in the potential requirement to cater for competing technology platforms and more complicated regulatory and market access conditions.

    Globalisation and scaling up is about to become tougher. However, the Chinese word for “crisis” features two characters signifying “danger” and opportunity”.

    If Huawei is forced to go alone on its OS platform then a reasonable question might be whether its Irish R&D centre, with circa 100 staff , is about to grow quite significantly?

    The thornier question might be… will America be pleased? Welcome to Trumpistan.

  • How ‘Digital Savvy’ is your Company Board?

    How ‘Digital Savvy’ is your Company Board?

    At the recent Dublin Tech Summit this writer was struck by a Ryanair recruitment stand proudly proclaiming its status as  “A data company with 450 aircraft”. 

    For a company which physically transports 120 million passengers through the skies each year the data company descriptor might strike some observers as somewhat stretched. However, there is no escaping the fact that even the most traditional businesses are increasingly dependent on digital expertise to grow and remain competitive.

    Indeed, the Ryanair story would have been very different without a powerful website capable of scaling up and processing more than €7 billion of flight payments each year.

    For many businesses the successful adoption of technology is a must but it might surprise readers to learn that digital expertise at board level is in short supply in a number of sectors.

    The MIT Sloan School of management recently published a paper , “It Pays to Have a Digital Savvy Board”, which revealed the findings of a machine learning analysis of the digital know-how of all the boards of U.S. – listed businesses.

    The definition of ‘digital savvy’ was based on directors’ understanding, education and experience of the impact of emerging technologies on business success. And, they measured this competency by analyzing data from surveys, interviews, corporate communications and the bios of 40,000 directors.  The results were striking.

    Just 24% of listed companies in America with more than $1 billion in revenues had digital savvy boards, and those businesses significantly outperformed other companies on key financial metrics such as revenue growth and market cap growth.

    The analysis also discovered the magic number for digital savvy status was “3” i.e. it takes three members of the board to deliver a statistically significant impact. 

    The financial metrics speak for themselves; companies with three or more digital savvy directors delivered 17% higher profit margins than companies with two or fewer, 38% higher revenue growth , 34% higher return on assets and……34% higher market cap growth. 

    The effects of digital savvy boards were consistent across industries, although the percentage of such boards varied by industry. Think about Ryanair again, and then wonder at the challenges facing retail (just 24% savvy) and transport(8% savvy) in the table below…

    It is incredible to think that the extremely challenged retail industry in the Amazon era is so poorly resourced at board level. It is also interesting to note that specific technology knowledge is not the critical assist but rather experienced insights on transformation decisions and trends.

    The MIT Sloan report summarizes this type of digital experience in the board room rather well:

    “….rather than focusing on the basics of the technology itself, digitally sophisticated board members use their insight about trends and transformation to help managers explore the bigger picture the business is facing competitively. As one of the directors we interviewed put it: “Digitally savvy directors change the risk conversation from evaluating the project risk of particular initiatives to the business model risk of not doing something new.”

    Clearly, this study was conducted with large businesses but inevitably best practices will filter down to smaller companies. Particularly, venture capital practitioners will tell you how critical the founder is to their evaluation of a funding prospect even ranking higher than a fantastically innovative product or service. Start-ups looking to raise funds on Spark Crowdfunding should take note!  

    On the basis of the MIT Sloan findings above it is worth careful consideration for founders of start ups to impress upon potential investors how they access independent digital savvy counsel. 

    In fact, what could really impress is a founder who has put together a digital rich advisory board.

  • With the current pace of change, where will our children work?

    With the current pace of change, where will our children work?

    More than 60,000 candidates will sit the Leaving Certificate next week. The parents of these children will understandably be anxious as to how they fare in the race for prized places in third level education but such anxiety is possibly a wee bit misplaced.

    As recently as 1980 just 20% of secondary school leavers went on to third level education, but that figure is now well over 60% suggesting opportunities to maximize career potential have risen exponentially for our children. Possibly not.

    A cursory glance at financial markets would suggest that educational uncertainty should now be replaced by career uncertainty.

    The S&P 500 is a market index whose constituents are 500 of the largest companies in the US ranked by market capitalisation, or value in layman terms. This index is not set in stone and is subject to the forces of creative destruction. Companies drop off the list for one of two reasons; they can be the subject of corporate activity – buyouts, mergers, acquisitions –  or they can fall below the market cap threshold and replaced by faster growing companies.

    In the 1960s companies on average could expect an average tenure in the S&P 500 of 33 years. That average tenure shortened to 24 years in 2016 and is forecast by consultancy, Innosight, to shrink to an incredible 12 years by 2027.

    The acceleration in longevity decline is not the result of increased corporate activity but by the rapid evolution of technology and the structural destruction of many industries. Think railroads of the 1950s, newspapers and retailers in the 2000s. This the challenge facing the graduates of tomorrow – trying to avoid career paths which meet sector obsolescence.  Energy is the future, right? That depends….

    Despite Mr Trump’s love affair with “beautiful clean coal” there is a structural shift in employment in the energy sector which might surprise.  The number of US jobs in solar energy overtook those in oil and natural gas even before the current President came to power. The chart below is fairly striking:

    Readers might also be surprised to know that despite Trump’s big oil support, Iran tensions, healthy global growth, record market(S&P) highs and the post-Fukushima decline in nuclear power, the largest quoted oil company in the world, Exxon Mobil, has experienced a 25% decline in its share price since solar took top jobs spot in 2015.

    Very often a multi-year slippage in the relative value of a sector in an index can signal a structural decline for an industry(sector). Take a look at the long term charts of  companies in retail, media, telecoms and financial services’ sectors and you will see more losers than winners. These are the victims of creative destruction wrought by new digital technologies.

    A current check of the weightings of sectors in the S&P 500 is also instructive.

    The technology sector accounts for more than 25% of total S&P 500. No doubt many of these companies will have their own risks of technological obsolescence but spare a thought for the financial sector which once accounted for more than 20% of the index. It currently sits below 15% and that’s when financial conditions are at the most benign this planet has ever experienced.

    A quick tot up of S&P structurally exposed sectors like energy, utilities, financials, retail and communications can readily account for more than a third of the market right now. This figure may resonate with market historians who will know that transport(railroads) accounted for 38% of the US stock market in 1900. Today it is 2%.

    The following stunning graphic from Visual Capitalist illustrates the shifty in sector significance over 200 years:

    Clearly, humans are not great at forecasting the future but it is safe to say technology will be a significant part of the lives of the leaving class of 2019.

    Perhaps the more pragmatic approach is to build knowledge and skills rather than commit to a specific industry. More particularly think about working with technology rather than in technology.

    A recent Accenture report highlighted the challenge for employers meeting a skills crisis but also provided a reasonable guide to under-graduates as to where employers will look in the future:

    “To many, the response to the skills crisis is simple: train more engineers; raise the number of arts graduates. But creating larger cohorts with certain skills is not the answer. Two things stand out in our analysis:

    • Creativity, socio-emotional intelligence and complex reasoning are the skills that are rising in importance across every work role. These skills are not taught in today’s learning systems. They are acquired through practice, experience and often over long-time periods.
    • The blend of skills required by each worker is becoming more complex. There needs to be a greater emphasis on broadening the variety of skills within each worker.”

    Another useful guide to the skills required of the next generation is to look at the founders of start ups in today’s world. They tend to be creative thinkers, technology-savvy and articulate communicators of their vision. Furthermore, the sectors where start ups are focusing can give a good guide to our children’s future. For the anxious parents out there you might consider going to a few EIIS start-up presentations and getting a sense of the skills and sectors which are likely to feature in your own childrens’ careers…..

     

  • Can Equity Crowdfunding avoid the emotional crowd?

    Can Equity Crowdfunding avoid the emotional crowd?

    Human beings are social animals with 70 to 80% of our waking hours spent in some form of communication. On average we are speaking 30% of the time but we do significantly more listening at 45% of the time. So, more than half our waking hours are spent taking our cues from our environment, especially other people, on how to act. Humans have survived and prospered because of our ability to band together but this adaptive behaviour has hard-wired our brains to be consistently awful investors. Harsh? Check out the data.

    The results of research done by Dalbar Inc, a company which studies investor behaviour and analyzes investor market returns has consistently highlighted below-average returns for the average investor. For example, the 20 year period to 2015 saw the S&P 500 deliver an attractive 9.85% per year. However, the average investor missed out on almost half those returns with an annualised performance of just 5.19%. Before we reveal the reason behind this debacle here’s another data point which might give the reader a clue. Fidelity, the giant fund management company, conducted a study a few years ago of its highest-performing individual investor accounts. The report when published attracted quite a bit of publicity when the star performers weren’t exactly market experts or algo-savvy wizards. The galling reality for Fidelity and thousands of embarrassed wealth advisors was that the top-performing account holders had either died or totally forgotten they had an account!

    The problem for the average investor is that our psychological DNA leads to illogical investment decisions based on emotional reactions to the short term good or bad news flow generated by the crowd and its media channels.  We eschew our normal retailing discipline and insist on buying goods/funds when prices are flying high and then returning goods/funds at ‘on sale” prices rather than original purchase prices.  No wonder Warren Buffett wrote in his annual letter in 1986, “Inactivity strikes us as intelligent behaviour.” On the subject of Buffett, there have been libraries of literature on his investment process but perhaps his greatest business initiative was to consistently educate his investors as to the value of time and a long term perspective. Sadly, this logical use of time and the miracle of compounding income is absent in the majority of investor pools. Additional research by Dalbar Inc shows that the average holding period for supposedly long-term investment fund products is just less than 4 years. This week’s events will no doubt add to those damning statistics.

    As financial headlines scream Trade wars (China), Trump wars (Iran) and Tech wars (Facebook) markets have had a volatile week yet many will resist the logic of doing absolutely nothing. Apart from counsel from a professional advisor, a little bit of long term perspective can prevent our hard-wired urge to “fit in” and join the reactive emotional crowd. Think about all that trading, emotional activity and then consider that the S&P 500 in the 93 years since 1927 has had just 11 years where markets were down by more than 10%.  Those scary headlines this week didn’t mention the 68 positive years experienced by the S&P 500 but that doesn’t capture eyeballs or generate commissions. In some ways, technology and ease of execution have exacerbated the problem, allowing investors to react quickly and emotionally to the prevailing mood of the market place. One does wonder whether one day we will have fund products which demand long-term commitment? It doesn’t look like a commercial winner but maybe there are more subtle offerings out there.

    If one looked for an investment proposition which required a long term capital commitment and contained some volatility comfort then an EIIS scheme could tick those boxes. It’s a 3-4 year commitment and a 40% tax saving provides a significant valuation comfort. For context, there have been just 3 years out of 93 years where the S&P 500 lost more than 30%. Funding start-ups, of course, has its own risks but the discipline of long term investing could, in its own right, be a diversification of behavioural risk. And for those still sticking to their social DNA requirements, there is a great opportunity via equity crowdfunding platforms to seek out EIIS opportunities and the less emotional wisdom of crowds!

     

    Enjoyed this blog? Then why not check out our other great content by clicking here!

     

    Spark Crowdfunding is Ireland’s only equity crowdfunding platform. We are based in Dublin city centre. Our equity crowdfunding platform enables investors to invest into various stage Irish companies and it gives Irish companies the opportunity to raise new funds quickly and at low cost to accelerate their business growth. Click here to find out more.

  • Beyond Meat or Beyond Technology

    Beyond Meat or Beyond Technology

    Last week the NASDAQ exchange witnessed the most spectacular company IPO debut since 2000.  There would be a temptation to seize upon the words “IPO” , “NASDAQ” and “2000” before writing a cautionary comment on a market overheating and revisiting the fearless greed of twenty years ago. However, there’s a significant flaw in using Beyond Meat’s 160% first day share price spike as a prescient data point. While there is no doubt that young technology companies are attracting the vast majority of investor funds these days, Beyond Meat has challenged that narrative as a straight forward food company.  This meat substitute business is a cursory reminder that consumer businesses selling every-day products can generate enormous returns for investors.

     

    Just ask the 20,000 pilgrim investors in Omaha for the Berkshire Hathaway AGM last weekend. Many attendees will have fond memories of great returns generated by investments in Coca-Cola, Heinz, Kraft and Dairy Queen accompanied by Warren Buffett’s wise words, “ Above-average returns are often produced by doing ordinary things exceptionally well.”  This is worth bearing in mind when one hears of retail investor frustration at missing out on “hot” technology funding rounds. In an Irish context the numbers would certainly indicate professional investors are ploughing most funds and analyses into technology stories – KPMG in its Venture Pulse report for Q1 2019 found $67m of the almost $69m raised by companies was concentrated on technology applications in healthcare and finance.  This sort of environment can “crowd out” companies seeking funding in more traditional sectors who at first glance might not conjure up visions of the next Amazon. However, to paraphrase the Sage of Omaha, the time to become greedy is when the majority are fearful. And, perhaps the place to become greedy is more likely to be on crowdfunding platforms which consumer focused franchises are increasingly using to fund their growth.

     

    At Spark Crowdfunding it has been noteworthy to see a number of these franchises complete successful funding rounds on the platform. In fact, consumer businesses approaching Spark Crowdfunding for potential campaigns account for a significant 70% of overall interest. For private investors there is a real possibility that current trends/fashions in the professional venture capital world are leaving some consumer gems on the investment table. Readers may aspire to being an early investor in an Amazon story but you might be surprised by a couple of consumer stories which have generated superior returns to Amazon and other titans of technology. Fancy an energy drink or a pizza?

     

    Let’s go back almost a decade ago to 2010 and you had the chance to buy shares in Amazon, Apple or Google. All would have generated very large returns from circa 300%(Google) to over 800%(Amazon) but not even a bonus 400% from a Facebook IPO in 2012 would catch a simple pizza story. Yep, Domino’s Pizza shares purchased in 2010 would have generated a 2000% return as per the stunning chart below:

    If you wanted an energy drink to go with your pizza then you could have ignored the TMT frenzy in 2000 with an investment in Monster Beverage Inc. That investment would have generated returns just shy of 60,000% and is, in fact, the biggest winner in the US stock market this century and ten times the returns on the almost 6000% produced by Apple.  Here’s the energized performance of Monster Bev in the chart below:

    The predictive power of a valuation is pretty much zero as human beings are not very good at forecasting the future. So, if the professionals are chasing hot technology and even hotter valuations there’s an opportunity for retail investors to unearth some real consumer gems with real growth futures at an early stage and lowly valuation. The future is almost impossible to predict but the Impossible Burger has arrived and with reasonable certainty we can say human beings will continue to eat and drink…..

  • Use It or Lose It – One Solution to Income Inequality

    Use It or Lose It – One Solution to Income Inequality

    The prevailing political narrative of recent years has been the rise of populism and right wing parties but the elections in Spain at the weekend give pause for thought.

    Socialists greatly increased their number of seats and conservative parties suffered crushing losses. As Jeremy Corbyn waits in the wings in a Brexit-paralysed UK and a succession of Democratic US presidential contenders advocate centre-left solutions, there are grounds for a reappraisal of the policy solutions likely to be demanded by electorates.

    The high priests of capitalism are also taking note. Ray Dalio, the founder of  the largest hedge fund in the world, has recently made the noteworthy observation that “capitalism is a fundamentally sound system that is now not working well for the majority of people”. 

    The World Economic Forum has also warned that rising income inequality poses the biggest threat to the global economy over the next few years.  Most surprisingly, surveys of the uber-wealthy by private banks like UBS are highlighting income inequality as their clients’ biggest fear – not inflation, not China, not terrorism, not rising interest rates, not recession, not trade wars. Remarkable.

    Dalio, a keen student of history, notes that the conflict between populists of the left and right contains echoes of the 1930s and he provides a striking Income Inequality chart for historical context. The chart below shows the wealth gap is indeed the highest since the late 1930s:

     

     

    One senses something has to give. The perennial policy dilemma is described rather well by Dalio when he states that “most capitalists don’t know how to divide the economic pie well and most socialists don’t know how to grow it well”. 

    Some readers will have seen US Presidential contender Elizabeth Warren propose a wealth tax for fortunes in excess of $50m but wealth taxes scare the hell out of lots of governments for the following reasons:

    1. In response to wealth taxes, the wealthy remove funds from the relevant tax jurisdiction
    2. Wealthy investors reduce investment as incentives to make incremental profits/returns are reduced

    One wonders is there a middle ground where passive deposits of cash over a particularly high level of, say $20m, incur an additional annual tax charge (see property taxes) UNLESS the equivalent amount is invested in smaller companies/start-ups operating in the same tax jurisdiction.

    There are already numerous EIIS-type schemes in Ireland, UK and US which provides investors with the option of investing in start-ups which have attractive tax incentives for the investor eg. 40% tax back in Ireland for EIIS investments. 

    The difference for the super wealthy is that these schemes would become mandatory to offset a wealth tax. The policy message would be clear: Use it or Lose it.

    Taxes or any mandatory directive on personal capital is never popular but these are challenging times in many societies and the 1% are already acknowledging a problem and the risk of a chaotic backlash.

    The attractions of EIIS-type schemes for policy makers would be a much greater chance of capital remaining onshore and a tangible support for business formation/employment from the private sector.

    In the event of such policies emerging equity crowdfunding platforms, such as Spark Crowdfunding, will be a natural conduit for investment flows. For both investors and start-up companies today there could be real opportunities in early utilisation of crowdfunding platforms.

    Firstly, companies can gain the experience of running a fundraising campaign in preparation for potentially much larger pools of capital being available in the future.

    Second, investors will undoubtedly see the attractions of early investment in a limited number of franchises which in the near future could be chased by a wall of new monies seeking refuge from capitalism’s response to an unsustainable situation.

    Now think about that…large pools of capital chasing limited opportunities. Early crowdfunding movers might be able to help, but at a pretty price!

  • Equity Crowdfunding Platforms – Keep an Eye on the Ladies!

    Equity Crowdfunding Platforms – Keep an Eye on the Ladies!

    The female wallet is expanding rapidly and this could be very good news for equity crowdfunding platforms.

    Recent reports on the $35 billion divorce settlement between Amazon supremo, Jeff Bezos, and his ex-wife, Mackenzie, may have supplied eye-catching headlines but this merely scratches the surface of a seismic global shift in the history of human wealth creation.

    The paper “The (Financial) Future is Female” published by S&P Global Intelligence to mark International Women’s Day in March 2019 details a doubling of female wealth in the 10 year period to 2020. For tabloid headline context the addition of $36 trillion in female controlled wealth equates to the creation of a $900 billion Amazon franchise every 3 months!

    The influence of female investors and entrepreneurs is growing rapidly and is very evident on the Spark Crowdfunding investment platform with a significant 28% representation in total investor registrations.

    For equity crowdfunding platforms this should be considered a very positive development for the valuation process in a fundraising campaign.

    Ultimately, valuations reflect risk and it would appear female expertise in this area has been recognised earlier than perhaps other activities in financial markets;  a compensation survey by Risk and Insurance Management Society revealed that women are compensated highest, relative to men, in risk management than nearly any other field.

    To be clear, this writer is not an advocate for gender-superior skills in risk rather that male and female approaches can be different and, in combination, more effective. Interestingly, the Peterson Institute for International Economics surveyed more than 20,000 companies in 91 countries and found that firms were 15% more profitable where more than 30% of C-Suite leaders are women compared to similar firms with no female leaders.

    An enhanced investor pool is good news for companies looking to raise funds but there is an equally important benefit to crowdfunding investors seeking returns on their equity.

    The integration of  environmental, social and governance (ESG) factors into investment processes and decision-making is now firmly established.

    Today ESG investing is estimated at over $20 trillion and is based on the assumption that ESG factors have financial relevance.

    In fact, the original ESG study published in 2005 was titled “Who Cares Wins” and this aspiration has received a massive boost from demonstrable superior returns from investment strategies using ESG factors.

    Research from Axioma has shown investment  portfolios weighted in favour of companies with better ESG scores have outperformed benchmarks by as much as 2.43% in the four years to March 2018.

    In the context of “The Great Wealth Transfer” occurring right now it is not unreasonable to expect companies scoring highly on Social factors involved in gender equality, workforce inclusion and female health to be the likely recipient of  influential network endorsement and funding from female wealth sources.

    Spark Crowdfunding has already successful completed two fundraising campaigns with female founders focusing on the healthcare space and there is no doubt there will be many more companies who will score strongly not only in ESG terms but also offer the possibility of strong equity returns for investors.

    Very few investments turn out to be Amazons but it is worth recalling Amazon started out commercial life in 1995 as an online bookstore, just the three hundred and fifty years after the first documented book clubs.

    Whoodathunk a book retailer would evolve into a trillion dollar franchise?!  Then again, what are the chances investment pitch books from equity crowdfunding platforms could be the time-friendly texts of the future to discuss with a cheeky bottle of Pinos Gris and avocado humus……?