Tech, Economics and Finance

How do VCs review start-ups? My experience

2012-11-29T11:36:00.001+04:00

Today I've found the question What metrics do VCs look for in early stage companies? on Quora. I decided to post my answer to the blog too. Through my experience is quite limited, I've become pretty familiar with the process during my five months in the VC fund. Maybe someone will find it interesting.

I'll talk about my experience, but it should be quite similar for every VC fund.

The process of reviewing early-stage companies at the fund I work for is quite structured.

First of all, we do some kind of screening trying to evaluate the company. At this stage, we just need to decide if we are generally interested in the idea, and the main thing to evaluate is the core idea of the project. The company's profile is not that important for now, as even if this particular start-up will fail to go through our reviewing process, there may be some interesting competitors.

If the idea looks interesting enough, the process continues and we look at the products the company has to offer, the current stage of development, team's profile. Talking about team, it is somehow important to have professionals with some experience in the field, but I would dare to say that it's not that much important as it's sometimes stated as there are tons of qualified people with great backgrounds who fail to deliver products, and sometimes a bunch of teenagers can create something truly amazing if they understand the needs of the market.

The it's time to take a closer look on the market, trying to evaluate the potential of the products, direct and indirect competitors, the current state of the market and if there is any interest for such products.

Usually if we go that deep we interact heavily with the founders in order to understand if they understand the market, have necessary skills to develop their ideas into successful products and if their vision of the future is similar to ours. We also prefer to have some kind of financial model to evaluate such metrics as IRR, CoC multiple, amount of cash need to be injected and so on. Also to have financial model is quite helpful as we can review in details the assumptions on which the model is based, see how they correllate with our understanding of the market and try different scenarios. But of course, all models are quite simple at this stage and aren't always accurate.

With $2-$5mm average deal size we rarely invest in companies without some kind of prototype or launched beta and some statistics to make forecasts but for seed stage there may be no financial models and such things so then this stage is skipped and all the process will concentrate on the ideas, team and product development.

The whole process takes from 2 to 5 months on average, and about 1 company out of 30 goes through it (this number should be hugely variable and depends on the market VC fund looks for, the focus and their channels to get information from).

Observations About Tech Market, Part 1: E-commerce

2012-10-09T00:15:00.002+04:00

In the comments to my previous post, I was asked about what companies on Russian high-tech market can be described as interesting and what start-ups have managed to develop into profitable companies. Well, I will try to answer this question, but I'll start a bit from afar.

It's impossible to write about everything in one post, besides it will be too long and boring to anybody to read it. So I'll break it into a series of articles each covering some segment of the market or some piece of timeline. If the topic will get some attention, I can write more specifically about some companies or areas.

First of all, let's try to divide high-tech into some sectors. Of course, such classification will be very subjective, and the best and most interesting companies are usually created on the edge of a few completely different spheres or even bring into being a new one area or business model. But if we still want to get some kind of classification, here is one possible variant:

E-commerce
Social networks
Search and its applications
Mobile payment
Online travel services
Online education
Games (mobile and PC)
Consumer web (all that doesn't fit previous categories goes here)

Now, a few more words about this classification. First of all, it's incomplete. There should be no such thing as Consumer web, as almost every company can be added to this area - in fact it has no specific description. Secondly, some of these areas may be divided into several independent sectors, or vice versa, merged into one. So, it is just some type of classification which I feel comfortable to work with.

Now, let's try to begin observing each sector. Today I'll talk about E-commerce.

E-commerce

This sector seems to have little connection to high-tech or startups, but in fact it has been probably the most profitable area during the last few years. The large share of venture capital is also invested in this sector.

In the last 5 years or so a lot of great businesses were launched in this field - and there were created two completely new business models. Their creators managed to develop their startups into multi-billion dollar companies, a lot of competitors tried to copy their ideas, and many of them successed. These ideas are group deals and shopping clubs.

Group deals - new view on the whole retail business or the way to nowhere?

The first site of its kind, Groupon, was launched in November 2008. Two years later, it covered North America, Europe, South America and Asia, and had over 35 million registered users. There were four major investment rounds, and that's excluding seed financing and the last relatively small financial round in February, 2011. Through these rounds, the company got a fantastic $1.1 billion, including $950 million in the last huge round of financing. After that, Groupon was valued at about $12.8 billion during its IPO, an impressive amount of money, but way less than predicted by analysts $25 billion valuation. Today, its market capitalization is about $3.43 billion, and the downfall continues.

According to the description at Crunchbase, Groupon "brings buyers and sellers together in a fun and collaborative way that offers the consumer an unbeatable deal, and businesses a large number of new customers". The model is quite simple and very appealing. The company has been expanding its operations throughout the world at a fantastic pace. So what's happened?

Several reasons have been named, and much more can be imagined. The main problems are the need of huge marketing spends to acquire new customers (and also to maintain the current ones), the rising competition from the global clones (such as LivingSocial, which received more than $800 million in funding, including two last rounds led by Amazon) and local ones (such as Russian Vigoda.ru), and the inability to continue to scale up by acquiring local competitors, as almost all market are either already controlled by Groupon, or have its own established players now.

So, the future of the company and the sphere itself is uncertain.

Shopping clubs - just another view on group deals process, or something entirely different?

Another, and a more interesting, at least in my opinion, idea is so called "shopping club". It is also a relatively new, as it was created just about 6 years ago, but today there are dozens of successful companies with revenues exceeding hundreds of million dollars all over the world.

Basic idea of shopping clubs is quite simple - there has been demand for some new business model from the apparel's retail, which is extremely unstable business, with high dependence on brands' popularity and seasonal changes in demand. The percentage of returns there is also higher than in any other segment and usually it is almost impossible to sell returned items as they can be returned in the end of the season, when there is no demand for them, and the next year they can become no longer popular.

In this situation, shopping clubs appeared to be able to provide great opportunity for the stores to sell unsold inventory. Shopping clubs are positioned as luxury clubs with by invitation-only membership. They collect unsold items from the stores and then sell them at heavily discounted prices for just a few days to its members. This model, in some aspects quite similar to group deals concept (large discounts provide an attractive opportunity to customers to buy goods, and large volumes help businesses to sell otherwise unsold inventory) is much more effective and stable, because in the business of selling apparel there was demand for some suitable solution in the industry, and group deals services do not adress any specific demand, and, while they can be quite profitable for customers, value proposition for businesses and group deals services themselves (due to high marketing costs and low loyalty and return rate of businesses) is really questionable.

The list below includes some examples of shopping clubs:

Gilt Groupe (USA, the company that started the industry, received $220 million in funding)
Hautelook (USA, acquired by Nordstrom for $270 million in 2011)
BuyVip (Spain)
One Kings Lane (USA, received $63 million in funding)
ideeli (USA)
Rue La La (USA)
Markafoni (Turkey)
KupiVip (Russia)

It is also very interesting to look at Russian market, as there is one very interesting company there named KupiVip.

KupiVip was started in 2008 by Oskar Hartmann, an expat from Germany, who created maybe the most successful startup in Russia since Yandex. Today it was funded with more than $100 million, including huge in terms of Russian market the most recent financial round of about $55 million, in which participated such famous VC funds as Accel Partners and Mangrove Capital Partners. Now it is not just a shopping club, it offers a full range of servicea including all-in service for offline stores to enter online retail market. KupiVip provides all infrastructure, and all that is required from the store is to provide goods and to run advertising campaigns to promote online store. That is really great service, and the list of stores using it includes such brands as Central Universal Department Store (ЦУМ). In the interview to Forbes in March, 2012, Oskar Hartmann said that he expect the company to have revenue exceeding $1 billion by 2015. Well, it seems definitely possible.

Of course, there are much more interesting companies in E-commerce segment in Russia and in the world. Ozon.ru, Russian version of Amazon, has got $100 million in funding, an enormous sum of money for a local (yet quite successful company), so its IPO is postponed now. Lamoda.ru, an online store focused on apparel, has just received an undisclosed sum of money in the $40-$80 million range from J.P. Morgan.

It's impossible to cover all events, but as anybody can see, both local and global market are alive and developing on a high pace.

I hope that somebody will find this article interesting enough to spend time on reading. Next time, I'll write about major trends in social networks' segment.

The Return of the...

2012-10-03T23:10:00.000+04:00

Hello, everybody!
There was no single post from me in this blog for more than 3 months, sorry about that. I doubt that I still have any readers, but I hope they'll return eventually. Now I hope to write a bit more often.

A lot of things happened during these three months - I have started a full-time job as an analyst at VC fund after completing a three month internship, I have begun my last year at the university, some other things have changed... But I don't want to bore anybody with all that stuff. Let's just talk about a new format of this blog I want to use from now.

Earlier this year I used to publish some thoughts on events and news in the world of economics and finance that I found interesting. And while it was quite funny and educating (for me in the first place), I don't think that this format has any future for me - not in this way, at least. I just don't have enough time for it - and besides there are always more news I would like to cover than I can just because it can be very time-consuming.

So, from now I will focus on one particular sphere - tech and especially tech startups. As I work in VC, I spend a lot of time monitoring market for new interesting companies and ideas, so I think there can be some interesting information I can put on this blog. I don't try pursue any particular goal - just want to share some of my thoughts on the market and maybe to get some comments in response (comments are highly encouraged, actually :-) ).

Well, that's not completely true - I do pursue one goal - I hope to draw some more attention to the Russian startup scene and at the same time to tell people in Russia (yes, I am writing in English, but quite a lot of people there actually know English so they won't have a problem reading this blog) about some interesting startups that are being created in their home country.

In fact, Russian tech market looks quite attractive - there are quite a lot of interesting companies created in the last few years, and at the same time the amount of possibilities still seems to be bottomless and competition is low. But there are two major problems - seed financing is underdeveloped and the culture of entrepreneurship in the country is awful. These problems can be solved, but it'll take time and some efforts from both entrepreneurs and investors.

I don't aim to contribute anything particularly valuable to the solution of this problem, won't publish any information that is not in public access, and won't try to write a magic article on how to create a successful billion-dollar company - if fact, I want to know that kind of things myself. But maybe some information and links provided there will be able to help somebody or at least will be a bit interesting.

Anyway, I hope it'll be funny for me to write and to somebody to read all the stuff. Frankly speaking, I have missed this blog.

Facebook: Biggest Technology IPO on Record

2012-05-18T00:57:00.001+04:00

"Facebook Raises $16 Billion in Biggest Technology IPO on Record", states Bloomberg headline. With the shares priced at $38, the top end of an increased range, Facebook becomes one of the biggest technology companies in the world based on its market capitalization. $16 billion are raised in this public offering, and the whole company is now valued at $104 billion.

Trading will start tomorrow, and stock price will most probably increase even more. There is no reason to try to predict the situation, but it will be a historic day. And I'm afraid not necessarily in a good sense.

Stock Trading Fleeing U.S. Exchanges

2012-05-11T01:35:00.000+04:00

While the markets are recovering slowly from the financial crisis of late-2000s, trading volumes on NYSE and Nasdaq OMX, the biggest U.S. stock exchanges, decline. A variety of possible reasons can be named, including overall slowdown in trading and the rise of popularity of smaller exchanges such as BATS. But there is one more reason - the increasing number of trades being executed at the wholesale brokerages or in so called dark pools - private trading venues.

There is a large article in Businessweek on the topic, called Where Has All the Stock Trading Gone?

According to the data collected by the market research firm Tabb Group, the share of trades executed "off exchange" has increased from 26 to 32 percent in four years, while the volumes traded on Nasdaq and NYSE have fallen by more than a third since 2000. Dark pools attract traders who execute large deals and don't want the market to know about them, and high-frequency traders. And wholesale brokerages now can compete with exchanges offering slightly better prices for sellers and buyers due to the rule for exchanges to increment quote prices at least for one cent.

Dark trading can help investors to earn more on the same operations (though essentially it is available only to the institutional investors) but the main problem of the last crisis was the lack of transparency, and off exchange trading is barely regulated at all. And today, while NYSE struggles to get the permission to provide prices in fractions in order to be able to compete with wholesalers, Knight Capital and the Securities Industry and Financial Markets Association, a lobbying group that represents big Wall Street banks, does its best to ruin this proposal. It looks like bulge bracket banks still prefer not to become subjects of regulation, and to earn money on the unfair markets. Some things never change, unfortunately.

Facebook IPO: An Event We Have All Been Waiting For

2012-05-08T16:23:00.000+04:00

On May 3rd, Facebook Inc. announced that the price of its stocks intends to be between $28 and $35, valuing the company between $77 billion and $96 billion. This week the roadshow must be started, and later in May we'll see the biggest IPO in the history of tech companies. After the rise in the beginning of this year, the markets remained quite weak for two months. Maybe this IPO will be able to boost them.

But aside from the possible rise of markets, is an IPO of Facebook with such a great valuation a good or a bad thing? As usually, opinions differ.

In fact, Facebook IPO is quite unique even for the tech sector, or at least it's unusual for the companies of its size. Unlike many other companies that have eventually become giant, Facebook is already very large. When Google went public in 2004 it was already quite famous, but its value has increased ten time since then. And it was the biggest tech IPO in history at that moment. Even if Facebook will go public with $77 billion valuation, it is nearly impossible to imagine that it can grow ten times - then it will cost more that Apple today.

So, it seems that the potential of the future growth is very limited there, and it has always been the main incentive to buy tech companies' stocks. What can Facebook suggest as an alternative? Only great revenues and large dividends in the future. But there is one problem - with present revenues, Facebook's Price to Earnings Ratio will be higher that 50x in any case. And while many companies in tech sector have higher multipliers (LinkedIn, for example, has P/E at level of 900x), all of them are way smaller that Facebook. Of course, the revenues of Facebook have been growing steadily for years, but it can by no means guarantee that the growth will continue. In fact, the last report concerning revenue for the first quarter of 2012 is even disturbing - Facebook seems to begin to spend much more on marketing, and while the revenues continue to grow, net income is less than a year ago. After we have all seen Groupon, which stocks have lost more than 50% of the price since the public offering because of its ineffective business model, large expenses on marketing seem definitely disturbing.

Nevertheless, it is obvious that Facebook IPO will draw a lot of attention, and the price of the stocks is likely to soar after the public offering. Facebook is by no means similar to GroupOn today, and it can be a good investment. It just seems that you need to find an answer to the question "What If Facebook Isn’t So Special After All?" raised in Businessweek a month ago, before investing.

New Europe In A Weekend: French And Greek Election Results

2012-05-07T22:25:00.000+04:00

It can be said that this weekend has changed the face of Europe. Yesterday François Hollande, the candidate for presidency from the French Socialist Party, won the election. A Socialist will be a president for the first time in 24 years. François Hollande secured 51.7% of votes. And now he is literally responsible for the fate of Eurozone.

In the meantime, in Greece the elections rouse even more fears, putting, according to the Guardian, "neo-fascists in parliament for the first time, the hard left in second place overall". The future of Greece can be called absolutely unpredictable now, but it's obvious that the policy of austerity has failed, and the same can be said about France.

As Paul Krugman writes in his column for The New York Times about Greece,

Voters take their anger out by voting against the insiders. And since all the respectable people are inside the political tent, backing and being identified with failed policies, that means a big vote for extremists right and left.

In response to the results of Greek elections, the Greek stock market fell almost 8%. The French markets reacted less vigorous, French CAC 40 down only 1.7%.

Now, it seems that the main question is whether Mr Hollande supports Angela Merkel or not. Angela Merkel is loosing influence, her coalition of Christian and Free Democrats lost an election for control of the northern state of Schleswig-Holstein on Sunday, and if François Hollande doesn't back her, the whole policy of Eurozone may change rapidly.

Ron Paul vs Paul Krugman: Federal Reserve Problem

2012-05-06T18:11:00.001+04:00

Hello! I haven't posted anything in almost two weeks, and I sorry about that but I have been extremely busy, and unfortunately things are not going to be better anytime soon.

First of all, I would like to share a spectacular video "Ron Paul, Paul Krugman Face Off" from Bloomberg TV. As the description states, Republican Presidential Candidate Ron Paul and Princeton University's Paul Krugman discuss their views on spending, inflation and the Federal Reserve.

In fact, some parts of this conversation are very funny - especially the moment when they both refer to Milton Friedman. Nonetheless, the problems being discussed are extremely difficult, and the views on them can be absolutely opposite, the video once again demostrates this.

High-speed trading: when time really matters

2012-04-23T20:06:00.001+04:00

Earlier this year some information on so called Project Express, $300 million transatlantic fiber-optic line between New York and London, had appeared. This line will allow high-speed traders to execute orders in 59.6 milliseconds, and today the best time that can be achieved is about 64 milliseconds. Project Express should be finished by 2013.

However, it seems that a small company called Perseus Telecom have already found a way to reduce time to less than 60 milliseconds. Instead of building a new cable, Perseus Telecom has chosen to modify FLAG Atlantic-1 North cable. And it looks like the competition is far from over, as it is possible to reduce the time to 40 milliseconds, or even less if someone would choose to drill through the surface of the Earth rather than to run cable along the ocean's bottom. Soon we'll see.

Businessweek:
High-Speed Trading: My Laser Is Faster Than Your Laser (Perseus Telecom story)
Stock Trading Is About to Get 5.2 Milliseconds Faster (about Project Express)

The IPO market's activity

2012-04-16T15:56:00.000+04:00

While the number of IPO deals in the first quarter of the year is the largest since 2007, the deals are relatively small in size and the markets are quite calm. It seems that today the whole market is waiting for Facebook's IPO. And if it is successful enough, it may be able to kindle the growth of the internet technology industry at least.

Businessweek: The IPO Market: More Deals, Smaller Prices

Apple Marvel: Part 3. Causes and consequences.

2012-04-14T23:58:00.000+04:00

I have written two posts with my thoughts on the future of Apple's stocks prices so far. The first one was about the possible problems connected with market perception that may restrain future growth of the price. In the second post, I made an attempt to review Apple's business to find out whether the further expansion is possible. Now, let's take a look on Apple's multipliers to complete the picture.

So, the numbers for Apple are:

Capitalization	$564.3 billion
Annual Profit	$33.0 billion
Annual Profit/Share	$35.37
Price to Earnings ratio	17.1x
Book Value	$90.1 billion
Book Value/Share	$96.59
Price to Book ratio	6.3x

A lot of other financial parameters can be brought, but there is no point in it. Even these numbers are necessary just to provide the ability to compare Apple with the other companies in the field.

First of all, let's talk about Price to Earnings ratio. In different industries different values are considered as normal, but for companies in the internet technology sector, it is not uncommon to have this multiplier at the rate of 20 to 60-100 for smaller companies, and from 10 to 30 for the largest ones. For example, today Google has 18.8x P/E, Microsoft - 11.0x, IBM - 14.8x, HP - 6.0x, Intel - 10.8x, and Amazon - a ridiculous 135.9x. So, the current value of Apple's P/E seems absolutely normal. Of course, if the stock price continue to grow, and the earnings stabilize, the value will rise. But to reach level of 30x, capitalization must exceed $1 billion, and taking into account the permanent growth of earnings from year to year, capitalization estimation should be even higher.

While P/E can be viewed as the main multiplier to evaluate whether the price paid for stocks is fair, of course there are other aspects, such as Price to Book ratio, the amount of total liabilities and its structure, the amount of dividend payments and many others. But the trick is that situation for Apple is absolutely normal in every aspect - it is by no means a healthy and solid company. Again, for example, Price to Book ratio for Google is 3.3x, 11.1x for Amazon, 4.0x for Microsoft and 11.6x for IBM, so all these companies can be compared from this point.

It seems pointless to continue trying to find any factors that can stop Apple's stocks price from further rise. While there are a lot of logical causes to doubt in the prospects of growth, from the point of finance it is definitely possible.

---------------------------------------------------

That was the last part of this story. It seems that the growth is likely to continue, but I still think that one should be very careful investing large amounts of money in Apple's stocks, especially through various funds, as risks are relatively high.

Sony Corp. - Once Great Company

2012-04-12T19:51:00.000+04:00

Sony announced that it had lost aproximately $6.5 billion in the previous fiscal year. It is the biggest loss in Sony's history. In a year, the price of stock has fallen by 40%. Kazuo Hirai, who had replaced Sir Howard Stringer as CEO, announced digital imaging, gaming and mobile phones are now core products of Sony. TVs are no longer in the list. Actually, Sony TV's production has been giving it nothing but losses for eight years, and Panasonic and Sharp appear to have to deal with the same problem. Kazuo Hirai had already announced that TV's divisions would be halved, but this doesn't seem to be a solution. Apparently, Sony needs to rethink the whole conception of its business.

The Economist: Back in Japanese hands

Santorum Exits: The Rivals For The President's Election Are Finally Defined

2012-04-11T21:45:00.003+04:00

The Economist: Rick Santorum exits

Thank Heaven, the most awful Republican candidate ever suspended his campaign, leaving Mitt Romney to fight for Republicans on the election. To explain why Santorum was so bad, let me just quote one sentence from the Economist article:

His views on social issues were well outside the mainstream, he said odd things about sex and contraception, and he saw creeping "Islamofascism" around every corner.

I strongly recommend to read the whole article. It's relatively small and extremely well-written. And the author's attitude toward Santorum is expressed without any sign of political ethics or moderation. Maybe it is the main charm of British press, actually - it is almost entire free of political concerns, especially the Economist.

So now it is Mitt Romney against Barack Obama. While Romney has way more reasonable views than Santorum, I would strongly prefer Barack Obama to be elected for the second term. A lot of various problems may appear if Republican party wins.

The major one is the fact that most Republicans tend to support hawkish views on economics, and Mitt Romney is not an exception. While the possible rise of inflation if the ideas of some Democrats are implemented will be definitely dangerous, U.S. economics can suffer greatly if the stimulation of the economics stop now. Besides, Mitt Romney promised not to appoint Ben Bernanke for the third term. And today, when the whole world is dependent on the state of the economy of USA, this issue should bother not only American citizens.

Also there is no chance that the Dream Act and other laws connected with immigration issues will pass if Mitt Romney wins the election. Current immigration system is ridiculous and unfair. The country once created by immigrants now requires people who want to move there to spend years trying to find way to fulfill their dream. Immigration systems used by Canada, Australia or Great Britain have flaws, but they are much more transparent and the requirement are easier to meet.

If Mitt Romney wins, there may appear other changes in political and economic policies that are not so evident now. Anyway now it's almost useless to try to predict anything. Let's just wait and we'll see.

Bankers Without Dignity

2012-04-10T18:47:00.000+04:00

Great logical reasoning from Paul Krugman: Bankers Without Dignity.

Rick Warren: The only way to get people out of poverty is J-O-B-S. Create jobs. To create wealth, not to subsidize wealth. When you subsidize people, you create the dependency. You — you rob them of dignity..

Paul Krugman: My favorite entry in the comment thread, however, involved having pity on all those suffering Wall Street tycoons, who lost all their dignity when Washington bailed them out. I guess when you’re that down and out, the only thing to do is give lots of money to people who will repeal Dodd-Frank.

$1 Billion for Photos. Instagram Acquisition

2012-04-10T13:22:00.000+04:00

Yesterday Facebook announced the acquisition of Instagram photo sharing app for approximately $1 billion in stock and cash. While it seems to be a ridiculous amount of money for the company with one product and no revenue, in fact everything is a bit more complicated.

It is true that Instagram generates no revenue and it probably won't start to. But in this deal Facebook is actually paying for users, not for the commercial potential. And Instagram has over 27 million users on iOS alone. This number can almost double in the future: new Android application released last week got 1 million new subscribers in 24 hours. So Facebook pays about $20-$40 per user. Compared to $100 price for user in Facebook (based on estimated valuation of $75-$100 billion and 850 million users), it doesn't seem to be a very high price.

Of course, the entire idea of company's valuation based on the number of users seems ridiculous. But today in tech industry users can be viewed as the most valuable asset. It is usually possible to find ways to monetize project if you have a community, but if you lose users, your company is dead. Besides, Facebook revenues on advertizing are growing every year, so it doesn't seem an issue that the new service won't make any money for some time.

Nonetheless, there is another potential problem with the acquisition. Mark Zuckerberg announced that Instagram will keep its brand and will continue to exist as a separate application. Many other companies use this strategy, but it is completely new move for Facebook, which has always been run as a single product. Is it a good decision to keep Instagram independent? We will see, but right now it doesn't seem a right thing to do.

Google's Epic Battle: Searching for the New Philosophy

2012-04-09T23:20:00.000+04:00

Years when companies had clear specializations and didn't try to produce virtually everything at the same time are long gone. And in the tech field that never happened at all, actually. Today the competition becomes even more intensive as traditional hardware companies begin to create software, old companies fall apart and new corporations are being created in college dormitories.

After Facebook success, there were many attempts to knock it off the throne, but no one succeeded. There can be different explanations to this fact, and nobody can determine which one is right. Facebook has a lot of problems connected with functions and usability, yet it's still the most popular social network on the planet.

While tech industry is more familiar with the scenario when brand new companies destroy the old ones, the situation when a giant corporation breaks into new segment and outperforms all its rivals is not completely uncommon (remember the situation with iPod in 2001, for example). And Google was viewed as a potential competitor to Facebook almost from the beginning, despite of Google's indifference for social networking segment at first, and unsuccessful efforts to break into the field (Orkut experience).

Then in June 2011 Google+ was launched. Google has a lot of supporters all around the world (including me) and many of them were happy with the start of this project. But after a few weeks, major flaws came to light, such as poor functionality and controversial design solutions, and people began to return to Facebook and other networks, only occasionally visiting Google+. Maybe the biggest problem of Google project was lack of truly innovative functions. Their search engine years ago led to the revolution in information processing, and now Google+ looked just like a polished version of current social networking projects, with only a few relatively new ideas and limited functionality.

On April 4, 2011 Eric Schmidt resigned as CEO and was replaced with Larry Page, one of the co-founders of Google. One year on, it's time to take a look on the situation in company. There is a big article on this topic in Businessweek: The Education of Google's Larry Page, if you are interested.

And here are some of my thoughts.

When Google was started, the impressive technology developed by its founders helped it to conquer the world pretty easily. Nobody on the planet had anything of that kind embodied into a real business solution. Well, that may be not entirely true; for example, russian search engine Yandex had somehow similar developments in the area, and there definitely were others too. But it is more important that Altavista and other major players on the search engine market didn't have such technologies and didn't want to endeavor to create it. Now Google is the major search engine in the world, while Altavista is almost forgotten.

After this success, Google expanded rapidly. It was positioned to be a company with unique culture, great products and the emphasis to create things to make customers happy in the first place. And for some time, everything was great. Many remember the incredibly successful launch of Gmail services, for example. There were also examples of valuable acqusitions such as Youtube and Blogger.

But with the rise of mobile devices and social networks, Google positions began to look not so firm. While Facebook was attracting millions of new users, and Apple's iPhone was approaching to the title of the most successful smartphone of all times, Google created unsuccessful and controvesial Wave, Buzz and Orkut. The situation has improved with the start of Android platform, but the beginning of the patent war with Apple and other major players has brought new problems.

In such circumstances, the start of Google+ could be viewed as a great move. And partially it was. Google executives state that the network is successful and the work on it is in full swing. Of course, there is a chance that the situation looks much better from the inside, but the 3.3 minutes the average user spends on Google+ compared to 7.5 hours spent on Facebook seem really disappointing. Besides, the intergration between social network and search engine incurred displeasure of many users and draw attention of the Federal Trade Commission.

And it's only a short list of problems and changellenges. Some of them are just usual problems that accompany every large company at some stages. Others have deeper roots connected with the entire culture of project development Google was always praised for. Today creating successful and finished products may be more important than saving its reputation as the world's center for creative research. And it won't turn Google in some kind of the evil corporation. It'll just make it more effective. Fortunately, it seems that Larry Page understands that.

To sum it up, while Google is still one of the best companies, it should evolve to meet the challenges of the changing world and keep its special place in the industry. Good luck!

IPO for tech firms: U.S. over Europe without doubts

2012-04-08T12:38:00.000+04:00

While many tech companies were created in Europe and continue to work there, a majority of them prefer to have their IPO's in U.S., and the number is only growing. Attempts to turn East London into "Tech City", to create European School for Internet Professions in France, or to start Skolkovo in Russia seem unlikely to change the situation. The problem is that in U.S. there are more experienced investors, more money for tech IPO and maybe the most important factor is that tech companies are simply valued higher there.

You can read the article in Businessweek on the topic: Why Europe's Tech Firms ♥ New York

IT - industry that never sleeps: Facebook, Groupon, Apple news

2012-04-04T00:04:00.000+04:00

Being pretty busy this week, I'll only post links to a few topics worth reading today.

Technology sector draws a lot of attention nowadays, but this week is particularly generous on news.

After Friday report on the fourth quarter earnings (or losses, actually) Groupon lost more than 10% of stock price on Monday, proving again the inefficiency of the business model it operates, and the downgrade continues:

Groupon Tests Investors’ Faith After Revising its Earnings Downward

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Apple stock price is still rising, beating $630 mark recently. I hope to finish and publish the third part of my observations on the topic this week.

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And the last one - Facebook's IPO is approaching, but what will be next? There is an interesting article on the topic on Businessweek:

Facebook Delves Deeper Into Search

New heights of the stock market

2012-03-31T11:33:00.000+04:00

"The stock market has just finished the best 1st quarter in 14 years."

Yesterday such headlines appeared all over the internet. The Dow is up 8% and S&P 500 increased by 12%. Nasdaq composite index is up 19%, best start from 1991. While Nasdaq performance can be partly explained by Apple's stock price growth, what pushes other indexes to new heights? That's a good question. Is it a sign of the final end of recession? Or is it just the result of central banks' support, and the markets will fall back when it'll be removed? Nobody knows for sure.

There are many different opinions represented in Chicago Sun-Times article:

Dow ends best 1st quarter since 1998; Nasdaq up 19 percent

In my humble opinion, there are many signs that recession is finally over, both fundamental and technical ones. While the support of central banks is important, and the problems of housing market in US or of the debt markets in Europe can definitely slow down the rise, the new bullish market is not far away from now. However, it seems unlikely that the Dow can reach its all-time high of 14,164.53 till the end of this year, as Robert Doll, the chief equity investment manager at BlackRock, and some others reckon. The time for this hasn't come yet. I would be only glad to be wrong about my last statement, though.

Apple Marvel: Part 2. Is $1 trillion capitalization possible?

2012-03-30T17:49:00.002+04:00

In my previous post Apple Marvel: Part 1, I wrote some thoughts on the situation with Apple stock price. Now, I’ll continue analyzing it.

First of all, it seems a waste of time to try to build any complex models to predict stock price of Apple. In fact, it seems like no exact model can be built, just because this situation is quite unique. However, it may be possible to get a general idea on the future stock price behavior from analysis of the markets, similar companies and historical events.

Rising revenues - are portable devices and emerging markets the cause?

In October 2011, Apple Inc. reported enormous revenues. Detailed information about every aspect of its business can be found in Apple’s Form 10-K, as usually, but in a few words, total net sales increased by 66% to more than $108 billion, and net income reached $25 billion, 78% rise from 2010. The structure of net sales shows that almost half of total sales (43%) were produced by iPhone. Mac and iPad sales both produced about $20 billion, or 20% and 19% respectively.

Another important facts include these:

iPhone sales represent 87% increase compared to 2010;
iPad sales increased by 311%;
Mac sales increased by 25%.

What about segment operating performance?

Well, the sales in Europe and Americas increased by 49% and 56% respectively, Japan sales represent 37% increase (figures would be higher if there was no earthquake), and 174% increase in sales in Asia-Pacific region (mainly because increasing sales in Greater China).

While all these numbers can be interesting and impressive, there are some certain conclusions that can be drawn from it. First of all, mobile products are becoming incredibly important for Apple. In 2007 there was no such thing as iPhone, iPad appeared even later, in 2010, yet now they generate more than 60% of the revenue. Secondly, if Apple hopes to increase its sales at the same rate, it will have to focus on emerging markets, such as China and South America.

"Perfect" markets and corporate wars.

These are the facts. Now let's look at potential problems. The major ones include rising competition, dependence from mobile products' sales and patent war started by Apple.

It is impossible to get the sales increased by 50% every year without new customers. And while there are millions of loyal customers in Europe and North America, it seems unlikely that much more people will start buying Apple production there, just because virtually everybody who wanted to buy it has already become a client. In the meantime, the opposite is quite possible. Google Android, on which Steve Jobs spent so much time trying to destroy it, is becoming more and more popular. Moreover, Windows Phone 7 does its best to gain its place under the sun, and Windows 8, optimized for tablets, will be released till the end of the year.

Of course, there are also emerging markets, Greater China being the most important of them, where Apple can increase sales multiply. But there can be some challenges too. While China becomes more and more powerful player on the world arena, the majority of its population is still quite poor. Apple products are not very cheap, especially in comparison with Android-based devices that usually cost less than $150, both phones and tablets. Of course, they are not nearly as good as iPhone or iPad, but many people who can't buy Apple products will prefer them, thus strengthening Google positions on these markets.

And there is the third problem - corporate patent war, started by Apple. While the statement that this process was started by Apple may be not completely true, it's obvious that before Steve Jobs declared that he would do anything to destroy Android, the problem of corporations spending millions of dollars in law courts and then billions in fines was much smaller on the scale. The current patent system proved its failure years ago, but now it works like a disincentive, slowing down the production of new devices and complicating corpotation's work, not to talk about consumers being unable to buy certain products in their own countries. The main problem of Apple, as it was sagely stated in a new article in Businessweek, Apple's War on Android, is that it has only one phone model and one tablet model, and if one day some company will manage to proof that Apple violated their patents, the consequences for Apple will be disastrous.

So, what's the conclusion?

While it is possible for Apple to increase sales significantly for a few more years, it seems unlikely that such fantastic growth can last for long. The most popular company in the world simply can't become even more popular.

Will the stock price rise further when the revenue will stabilize at some point? Well, it's possible. In the markets' history there were such examples, besides current financial multipliers of Apple are not high enough to make the growth unlikely. I will pay attention to this "part of the problem" in the third and the last post on this topic. Then, with all three parts brought together, it may become possible to give an answer to the question stated in the header.

Another view - are the banks just intermediaries?

2012-03-29T00:56:00.000+04:00

A new article in Paul Krugman's "The Opinion Pages" in The New York Times represents an interesting view on the banks and their role in the financial system. The question actually appeared in context of another discussion (there are links to previous posts on Paul Krugman's page), but this particular problem is interesting of itself. In a few words, Krugman states that while banks can certainly be dangerous due to the tendency to accumulate risks, they do not increase consumption and demand for money by themselves. Rather, they are just intermediaries between lenders and borrowers.

Personally, I can't agree with this assertion, as I think that modern banks can influence demand, especially if they want it to be increased, but I still find this point of view quite unconventional and definitely worth consideration.

Here is the link: Banking Mysticism

The age of uncontrolled markets is over?

2012-03-26T22:18:00.001+04:00

As we have all seen, the idea to stop regulating financial institutions and let them do what they want to do was not a particularly good one. It may seem obvious now, but it definitely wasn't so evident ten years ago. The crysis has showed, though, that banks, hedge funds and many others will do anything they can to make more money. And it wouldn't be a problem if risks were kept under control. They only problem is that revenues and risks are not positively correlated. Besides evaluating risks for derivatives or complex financial schemes is usually an extremely difficult task.

The only solution in sight is to create a dynamic system of regulations to keep financial markets under control, and at the same time try not to interfere in their operations too much. The task may seem impossible, but with the right people it can definitely be accompished. Seems that Daniel Tarullo, one of the governors of the Federal Reserve appointed by President Barack Obama in 2009, is a good example.

Read about him on Businessweek: Daniel Tarullo, a Fed Regulator Who Actually Regulates
Or in Wikipedia: Daniel Tarullo

The housing market still far from recovery

2012-03-25T21:22:00.001+04:00

While the first three months of the new 2012 year can be viewed as quite satisfying in terms of economy recovery, the story is far from end. Unstable situation in Europe is not the only problem. According to January and February statistics, the housing market in USA is still in a bad shape. The recent efforts to revive it made by the government look promising, though.

You can read the article in Businessweek to learn about it:

Foreclosures Still Haunt the Housing Market

Also you may want to view Ben Bernanke lecture in which he explaines why the housing bubble can't be viewed as Fed's fault. It is his second lecture out of four in George Washington University.

Apple Marvel: Part 1

2012-03-25T01:52:00.001+04:00

On March 21st, Apple stocks closed at the price of $609.58, raising its capitalization to $568 billion. Although Apple has been the most expensive company in the world for more than a year now, the new heights being reached by the price of stocks are just astonishing. People started to ask if Apple should cost so much when it first outperformed Exxon, the world's most expensive company at the time. Now these questions begin to sound more and more loud.

Let's take a look at two charts: the first demostrates price of Apple stocks during the last five years, and the second shows the entire history of Apple stocks trading.

The company that was almost dead in 1997, have risen from nearly $13 per stock to more than $600. Moreover, in 2003 stock price was $20 on average, and in 2007 it was still about $80. Then Apple created iPhone and AppStore and the story began. In January 2009, stock price dropped back to $85 from nearly $200 in January 2008, but taking into account the whole market's conditions at that time, it's not very surprising.

Financial crysis of 2008 was severe, but rather short, Paulson, Bernanke and others did quite a good job, and markets began to recover. But now Apple wasn't just another company in a row. From the beginning of 2009, its stock prices climbed up without any significant pullbacks. In January 2010, it was traded at $200 per stock, at January 2011 the price was $325, and at the beginning of this year it reached $400 per share. Three months later, it is $600, and rising.

Five year change of its stocks price is more than 500%. Is it an enormous number? Of course, and any investor will sell his soul to devil to predict such rise. However, some other companies made their investors even more wealthy during the same period of time, for example, Alexion Pharmaceuticals (+1600% for five years) or Green Mountain Coffee Roasters (+1050%). The problem is that the other companies which value increased greatly, are much smaller. Alexion Pharmaceuticals and Green Mountain Coffee Roasters both have less than $20 billion capitalization, and most successful companies are valued at the similar point. Apple costs more than $500 billion.

Can Apple's value increase even more greatly and reach $600 or $700 billion, or even fantastic 1 trillion dollars? Maybe. I don't know exact answer, and nobody does. But there are some very disturbing aspects about future growth that would stop me from investing into this company, even though I like its reputation and its products.

Apple Inc. - the center of the world?

Apple is the most expensive company in the world. This is not just a simple fact to interpret. On the one hand, it means that everybody knows it, everybody sees its success, and of course, anyone would like to invest in it - mutual funds, individuals, hedge funds. People want to get their slice of the pie, and it only natural. It is also important to remember, that with such enormous capitalization, Apple's stock price affects almost all indexes, and many funds either invest in companies included into indexes, or they are being judged in connection with indexes' performance. So, virtually everyone is interested in the continuing growth of Apple's stock price.

But on the other hand, it means that people investing into Apple, will expect such enormous and even abnormal changes in its price in the future. What would you say, if the company which price doubled in two years will give you just 10% or even 20% profit in a year? It seems that you will be dissapointed. So the most successful company is not protected from failure in any way - actually, it is being put under great pressure of expectations.

Now let's look on it from the other side. When people buy stocks, they have different goals, of course, but any good investor must define strategy referring to the particular stocks or to the whole portfolio. What are the expectations connected with Apple stocks? Do people believe that it'll manage to reach $700 price? Or $1000 price? It is very hard to predict, but if you will look closely into stock charts, you'll see there were pullbacks after the first and the second reaches of $600 price, and the second pullback was quite significant. Of course, for almost any stock trading near $100-fold prices (or $10-fold, or $1000-fold) the picture will look pretty much the same, especially when the price reaches historic maximums. But massive sales near $700, for example, can make pullbacks more significant than those we see today, and this tendency may continue, making any new level more difficult to approach just because investors will not believe in the prospects of future growth - the company will be already too expensive. And such events may be viewed badly by the market which'll scrutinize the company's performance.

Of course, that is just one aspect of the problem. To be able to make conclusion on Apple prospects, one must also try to compare it to the other companies in the field, review its financial statements and look at the prospects of growth. I'll try to do it in my future posts.

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When I started to write this article, I discovered that the reach of $600 price by Apple stocks interested not only me. For example, there's a very good article in the Economist on this topic. I would recommend to read it to anyone interested in the subject.

Here is the link: Apple's share price - iRational?

P.S. My writing may seem incomplete or immature to you, but please try to find a few minutes to write a comment on it. It will help me greatly to improve my future posts, and I will be happy to hear if you like it.

Ben Bernanke - Saving the economy or destroying it?

2012-03-21T23:28:00.000+04:00

Ben Bernanke is maybe the most interesting and controversial figure in the recent economics history. Some people accuse him of inconsiderate and risky management of Federal Reserve system, others think that he has done his best during the financial crysis.

Personally, I tend to agree with the latter. Late-2000s financial crysis was quite unique, if not something completely new. The world has never faced such storm in the economy, even the Great Depression was better in some aspects. Maybe there was a better way to rescue financial system, but taking into account time constraints and the great compexity of modern global economy, I don't think that the work done by Ben Bernanke and his team can be frown at.

Anyway, it's always interesting to read something thoughtful enough and free of prompt accusations on this theme. Today, I found an article in the Atlantic magazine, thanks to blog of professor Gregory Mankiw. He describes the author Roger Lowenstein as "always reliable", so it seems to me that this article is definitely worth reading.

Ben Bernanke - the Villain