Category Archives: Economic Disasters

Dear Facebook, Wall Street is not your problem. Your ego is.

Facebook is in the news again. And as so often after its IPO, it’s not good news because Wall Street plays strong. But also more than fair.

Facebook’s user base is declining in countries where it reached a penetration rate of 50% or above. Consequently, in sight of growing market saturation, Facebook stock dropped. Again. What’s happening right now is basically what I questioned already in January. It seems I wasn’t that wrong about how Wall Street would behave in sight of a company which has reached market saturation in most of the more lucrative world markets, especially the US. Facebook clearly seems to be clueless about this new situation and it’s a pretty new situation to them. They’ve been investors‘ darling ever since because their story was just too good. Existential criticism is totally new to them.

Today, it’s a different game with different rules. And I am not sure yet if Facebook realized this. The new shareholders are investing for one of two very special reasons – earnings per share or increase in total share value. Facebook’s previous investors poured money into Facebook because of the outlook of a positive IPO itself. That’s two totally different motives.

While Facebook did considerably well raising the IPO hopes, it is very bad at playing the Wall Street game now. And unless Facebook’s strategy shifts towards accepting this new reality and honors the new ownership by increasing (or just starting to create?) real company value and not hopes, I believe Facebook stock will continue to see only one direction – down. Some people at Facebook, those with all the shares at least, cry when they see the current stock performance and some might believe this is just not right. But it is not about right or wrong. It’s about Facebook’s ego which is still just too big. And the good story is partly to blame for that. But sooner or later Facebook needs to face the new reality. It seems to me sort of a self-fulfilling prophecy that Facebook’s valuation will continue to decline as long as their ego is so big and they continue to think that playing to the rules of venture capitalists will get them through. But Wall Street investors like big pension funds and financial institutions think differently. As it seems now, Facebook still hasn’t realized the urge to shift from a venture capitalists’ darling to a company with a management that is serious about company value.

It’s time to wake up, Facebook. You voluntarily chose to play this new game so now you have to do it. Don’t hate the players.

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What’s your story now, Facebook?

Facebook Stock PerformanceLong time, no post, I know. No excuses here, but hopefully now at least a piece you enjoy….

There has definitely been some hype around the IPO of Facebook in the last days and at least the same level of disappointment. While I wasn’t following the IPO that much, I also wasn’t surprised by all the downs. I already expressed my doubts five months ago in my last post and if you still plan to invest in Facebook, read it now, please, it is free and good advice for a strategic long-term “value investor“.

So, what happened exactly?

Following the all-so-much-hyped IPO attributing a ridiculous valuation to Facebook, its shares dropped significantly. Media had something to talk about and found some poor people who they held responsible for the disappointment, but it’s all relative.

The truth is sometimes simple. There are three players here, Facebook, the financial markets and us users including the media. We all love Facebook. Facebook is social and as human beings we love social. Plus it’s the story of Silicon Valley, the story of a  dream for many of us. The financial markets, on the other hand, are not stupid. They are not social but driven by simple financial metrics such as dividends and increases in company value. We all know that much of the trading today is computerized trading anyway, so it is really the contrary of social. Facebook on the other hand embraced social as its “raison d’être” and never worried too much about what financial markets wanted.

So, what went wrong, exactly?

It is as one colleague recently told me as well: “I have to sell these guys a story!” That is what Facebook didn’t do or perhaps isn’t even able to do. What would be worse, I don’t know. But the markets have just made it clear that they want to have a story for them and not for the users. And that story must include profitability, revenue growth and a strong and stable business model. That’s what they appreciate and what they didn’t get. As I said in my previous post, Facebook needs a new easy-to-understand-and-still-full-of-dreams formula, but this time one for the financial markets. I am curious to see that.

So, what is your story now, Facebook?

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Will Facebook’s market saturation saturate Wall Street’s greed?

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So, it seems Facebook has achieved market saturation in the US in 2011. Now the fun begins, at least I am beginning to smile. While some already ask for more and different social networks, I could fall in love with the idea of a giant failing to fulfill dreams, expectations and desires from now on and taking some of its investors with him. Market saturation for a company which hasn’t gone public yet is a very interesting constellation and, at least to me, it is new. That makes it dangerous, as markets don’t like new that much, they are rather conservative. From now on it will be much harder for Facebook to convince sometimes irrational, conservative markets. Because imagination and dreaming potential is now reduced to more boring and sublime facts which in addition might also be more difficult to communicate. Instead of user growth, Facebook will need something else, another edge, another angle where it can excel, to convince public markets and its traders in the future, when it will be a public company. That is really hard to do, even for Facebook.

Previously, in the era before market saturation, investors could argue with impressive figures from Facebook and build up dreams that were fueled by user growth. It is simple math. Take existing, impressive figures and multiply it by an expected user growth rate and you get imaginary, but even more impressive figures. It is what you call a ‘run rate’ and Wall Street likes that. Private Investors certainly have taken into account future user growth when they valued the company in the many private rounds in the past. Facebook’s impressive ‘run rate’ was always priced into the pre-IPO valuation.

In the era post market saturation, that formula is no longer viable, the run rate slows down, the goal is achieved. Facebook made it and achieved market saturation. Yet the question will be if investors and Facebook itself can make the switch to a different formula that will have as much dream potential and imagination and at the same time is easy to communicate? No doubt, Facebook is a valuable asset. For some, it is indispensable. But for years, Facebook’s value was only limited to its impressive user growth and ‘run rate’ by too many people. Back then, it was good, because it is an easy to understand parameter where Facebook outpaced competition every time. And it is easy-to-understand parameters that Wall Street loves.

Now, it will be very interesting to see if sometimes irrational markets are ready to evolve and apply to Facebook different valuation standards than before market saturation and if Facebook finds that other easy-to-understand-and-still-full-of-dreams measure or formula. No doubt it will be interesting to see, as dealing with a company that achieved market saturation is something Wall Street hasn’t much experience in, at least to my knowledge.

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A Black Swan making the world green…

Black SwanNo, I am not color-blind.

Yes, the headline is still logically correct.

I’ll explain.

“Green” in this context is used as a synonym for “more energy-efficient” or “less CO2-consuming”, whatever you prefer.  A “Black Swan” here is not the bird in the image, but the phenomenon of a highly improbable, totally unexpected event with a huge impact on an  existing market or industry. Nassim Nicholas Taleb coined the term in his book  “The Black Swan: The Impact of the Highly Improbable”.

So, why is this important?

While the financial industry had its “Black Swan” in 2008 with the crash of Lehman Brothers, by then one of the most important banks in the world, with all its negative consequences on the world, we just witnessed another “Black Swan” in a different industry and this time, it is actually good that it appeared.

In the storage industry, that is the IT hardware manufacturers producing all the hard disk drives ending up in our computers, an unwritten rule was that prices for these disks fell continuously due to increased demand. As the world saves more and more data, companies in this industry could still make profit, despite falling prices and low margins. Falling prices required more and more economies of scale to remain profitable. Over time, this resulted in high barriers of entry for potential new companies and more and more concentration within the industry itself. This led to a de facto oligopoly where the remaining players in this industry felt comfortable – too comfortable in fact to innovate which is why we still use basically the same disk  technology from 30 years ago, just with more and more capacity.

Now, a “black swan”, a highly improbable event with a major impact, has occurred to this industry, in form of a severe flooding in Thailand, where the majority of disks are produced. The result is a externally-driven shortage of supply for hard disk drives and a consequent extraordinary price increase for the same. The “unwritten rule” completely flipped and the oligopoly’s old-fashioned, non-innovating companies find themselves suddenly out of their comfort zone. On a sidenote, the managers of these companies probably collected a lot of bonuses over the years, just by sticking to the “unwritten rule” of falling prices for hard disks while demand increases and are now completely “surprised”. Well, that is a black swan.

But this black swan, as uncomfortable as it is for the industry itself, is great for the world and offers a huge opportunity –  that is the big difference to the Lehman Brothers’ black swan and its extremely negative impact. Here, a non-innovating industry can be forced to innovate again through this external shock and produce better, more energy-efficient and maybe revolutionary products. At the same time, the other side, the consumers of hard disks or better disk space, can, in sight of rising prices, be forced to become more aware of how much and what to consume and also contribute to more efficient use of data by eliminating waste.

A “greener” world after a black swan arrived. I really like that idea.

Wikipedia says Resilience is a process, not a trait – Are you kidding me?

Resilience is in my opinion one of the most precious abilities an entrepreneur can have. Resilience can be everything. Missing resiliency can destroy your business in a second, and the chances are pretty high that you as an entrepreneur need to prove to the world every day and multiple times that you have that ability. That you have the guts to bounce. We all know that. Except for Wikipedia. When I looked up the term recently, I thought Wikipedia was kidding me when I read:

Resilience is most commonly understood as a process, and not a trait of an individual.

Apparently, for Wikipedia resilience is a process, not a trait. That is laughable. Sure the fact that you survive something, that you overcome business challenges, difficult situations, setbacks and failures, is a process. Sometimes, this process is very hard for the individual and it can take a long time, too. However, the fact that you are able to “bounce back” is due to your trait or ability to be resilient. A little outside of this context, famous German philosopher Friedrich Nietzsche coined the following quote:

What does not destroy me, makes me stronger.

F. Nietzsche

I like Friedrich Nietzsche more than Wikipedia. When you start a new business, especially when you try to be innovative to the point that your services or products are even disruptive, that means game-changing or market-changing, you and your few peers will have the whole world against you. You will need to be able to bounce back like you didn’t believe you would need to in your life. Nietzsche’s quote here reflects exactly the mindset that entrepreneurs and startup artists need to have to get up every morning again to pursue their dream of changing the world with their product, service or idea. And of course, this is a trait and not a process, remember that, Wikipedia!

Failed coupon business – Lesson learned, Groupon?

Southern Italy, known for good weather and great food, but not so much for innovation, is in the coupon business as well. In fact, they have been in this business for a longer time than any daily-deal site on the web and should have far more experience. More experience is usually a good thing as it can make a business more stable. Still, their coupon business now failed miserably.

School books in Italy are supposed to be free for the first years, basically for elementary school. The costs are born by the city administration. In Foggia, Southern Italy, the city sends coupons to the families for that purpose. Parents then go to the book store and exchange coupons for books. The book store owner exchanges coupons for money with the city administration, the circle closes. That is how it is supposed to be. Now the city ran out of money and still sends out coupons. This is not only stupid, it is unfaithful. The city’s trust capital, built up over the years, was destroyed in a second. Book store owners of course do no longer accept those coupons anymore. Coupon business failed.

This example forces me to view differently about Groupon, LivingSocial and other daily-deal businesses. The essential question is where in this circle is value created?  Is value created when you sell the coupon or when the actual business, the exchange of goods or services, is performed? If you think in terms of sustainability, only the latter can be seen as value creation. With every customer a business adds, it not only adds revenue but builds up trust, reputation and a reason to exist. Coupons alone might add immediate revenue, but not before the coupon buyer has turned it in and received the discounted good or service, any trust, reputation or sustainability can be added to the business. When Groupon or LivingSocial launches a very popular deal, like LivingSocial’s Whole Foods deal recently, its success is largely due to the business’s existing trust, reputation and standing among customers and not due to the daily-deal site’s excellence in execution.

Coupons are often abused as an alternative form of financing on the back of the customers – you don’t have to pay interest to a bank and even better, if coupons are not redeemed, you collect interest (at least virtually). That is why coupons are so popular among business owners. Still, sustainable value is not created when another set of coupons is sold, sustainable value is created when you make a new customer actually happy, when your business gains trust, reputation and respect. Following this logic, selling coupons, even to masses of people, is per se not a value-creating business. It can play a supporting role for small business owners for customer acquisition, but it is certainly not worth 50% or more of the total deal, as Groupon and others want to make us believe. Big businesses have started to realize that and are asking for a more appropriate share of the coupon deal. Small business owners will increasingly follow.

Groupon had to adjust its revenue and IPO expectations already several times. It is not that they do worse than before, it is a somehow natural adjustment. While they will sell coupons which could result in billions of value, the selling itself does not create a billion dollar business. Strangely investors do realize this only now.