:: The Park Paradigm ::

Markets for the Digital Generation

It’s all about the frame of reference: putting human and economic development in a readily accessible and understandable context, Hans Rosling gives a powerful presentation of the potential that exists for progress in some of the world’s poorest countries in this talk from TED 2007:

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About five years ago I bored some of my friends on how one should go very long 1960s and 1970s american muscle cars. The investment thesis was as follows:

(Demand side) Cars usually hit rock bottom in terms of valuation when they are approximately 20 to 30 years old; they are seen as just old and not yet ‘classics’. Also they have no natural buyers - the (mostly male) teenagers that coveted them in their youth are in the middle of paying off mortgages, having families and working hard to have the time or money to indulge themselves.

BUT…as these potential buyers reach their late 40s, 50s and 60s, they have both the financial resources and the mid-life crisis driven motivation to revisit the dream cars of their youth. Furthermore, fashion usually celebrates a revival of 30 year old ideas and designs and they enjoy a resurgence of interest (think music, clothing, popular culture and yes that includes…cars!)

(Supply side) Also 20 to 30 years after new, there are still quite a few around, most in the shape you’d expect a 25 year old car to be in, passed down the value chain as a cheaper and cheaper second hand car until it rusts out and dies.

So when the enthusiast start to buy and restore these old hulks, only a few are saved from the junk yard and over time many of these are used for parts and spares, further depleting the supply.

So what did I do about it? Nothing. Nada. What a muppet. And just to make me feel worse (and motivated enough to write this), today I stumbled across (channel surfing) the fact that this 1971 Plymouth Hemi ‘Cuda Convertible sold at auction earlier this year for…(wait for it)…$2,420,000!!! (yes not a typo…almost two and a half million dollars!) Sure, this is the best of the best, but pretty much any top condition good car from the era is now regularly topping $100,000 - most of which you could buy for less than $25,000 ten years ago (and less than $10,000 twenty years ago.)

So why didn’t I do anything about it? Two main (related) reasons: firstly, almost all of these cars are in the US, living in the UK meant that I would have to be extremely organized and motivated to ‘get involved’ and secondly, I would have had to find someplace to store and maintain them. Unless this was my main passion or hobby, realistically the barriers to entry were too high to participate in this market. At least based on how it is currently structured (physical delivery only.) If only an online electronic derivatives market had existed…I know it is back trading* but hand on heart, I would have invested (of course ideally this would have been through my pension plan, but probably unlikely given that the trustees tend to think anything that isn’t long large-cap equity is ‘too risky’…I’ll skip pointing out the ridiculousness of this investment philosophy despite the real damage it is doing to most people’s long term savings…) Yes Virginia, there is a point (to this post): here is yet another example of an alternative asset class (in this case similar to other real assets or collectibles like art, wine, even property etc.) that would benefit from a (financial - ie cash settled) derivative market. Clearly there are a number of difficulties in creating such markets in assets that are by definition highly heterogeneous, but given the technology and financial know-how available today, previously intractable difficulties can now in my opinion be overcome.

I guess I should put my money where my mouth is and get cracking.

(* no wikipedia definition…for those of you not familiar with this trading floor jargon, it means ‘trading’ after the fact…which of course everyone is very good at, hardly ever losing money… )

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The Ft says so. Weather (risk) is a real market:

Peter Brewer, fund manager for the Cumulus Weather Fund, says weather derivatives are an attractive investment proposition.

“I think it’s a perfect market. You can’t spook it, you can’t manipulate it. You can’t make people think it’s going to be 110 degrees in London next week,” he says. “And of course, weather is absolutely uncorrelated [to other asset classes].”

…

That development has left enthusiasts such as Pablo Triana [a professor at Madrid‘s Instituto de Empresa and an expert in weather derivatives] arguing that the market has the potential to be the biggest in the world. “Anything is possible, because there’s no weather risk you can’t hedge,” he says.

The article goes on to talk about WeatherBill and quotes David Friedberg:

“Our mission is to remove the risk of weather from all businesses, for all needs and all purposes,” chief executive David Friedberg said, adding that “no contract is too small. We’ve sold a weather derivative contract for a dollar”.

Mr Friedberg’s clients include car wash companies, hair salons and golf courses. “I’m also on the phone to farmers all the time,” he said. “The other day one farmer rang me up and said his sows wouldn’t make a move to mate if the temperature went above 95 degrees Fahrenheit. He wanted to hedge against that.”

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I was pretty disappointed by the lack of insight and articulate views on finance that I heard sitting in on the “Entrepreneurship and Investing “discussion panel at the Supernova 2007 Challenge Day. The professional ‘VC’s’ on the panel were actually very articulate and - although I didn’t really think they said anything insightful - gave measured intelligent answers to the questions they fielded. Unfortunately, everything the two ‘angels’ on the panel said could at best be described as banal, and at worst was just a plain dumb amalgamation of platitudes, irrelevancies and inarticulate generalities, and did a huge disservice to an audience made up primarily of aspiring entrepreneurs.

Question from the audience: “How do you approach valuation in the companies you invest in?”

Angel answer: “I don’t worry about valuation, it’s around $2-5million for a start-up…”

Ummm… right man. THAT makes sense. No sense wasting time on valuation…it’s a couple mil, right?…btw what does the company do?

Everyone knows that valuing a start-up is not an exact science, but that doesn’t mean that there is NO science…there are many different approaches - based on option theory, discounted cashflow, discounted terminal value, etc. - that can be used to frame the discussion. Together with a probabilistic approach to outcomes, they can frame the valuation and the process of working through such a framework is helpful in terms of testing and adapting assumptions and building a more robust business case and execution strategy. As long as one doesn’t confuse precision for accuracy and over-engineer the process, a robust valuation discussion is the perfect vehicle through which to make sure the entrepreneur and the investor are on the same page.

One of the most ridiculous assertions to come from the (angels on the panel) was that the only place in the world where you could innovate and raise capital (for innovation) is Northern California. I’m not even going to bother wasting my breath deconstructing this idiotic and parochial worldview - and I’m going to try really hard and convince myself that this view is just one/two man’s opinion and not representative of a commonly held view - but all I can say is that I think there is a huge opportunity to connect smart (non-Valley) money to smart entrepreneurs everywhere.

There is a certain irony in the lack of innovation in the financing of innovation, don’t you think?

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Just before I went to Africa, I happened to notice that my former employers had taken down the link to the AmazonBay film at www.amazonbay.co.uk & www.drkwrevolution.com/2015. Not exactly sure when it disappeared but have been meaning to get it up on my site in any event and hopefully will soon be able to get the original url (which is printed on all my personal cards!) to re-direct once again to the video which you can now find here (I’ve also updated the link in the sidebar.)

Looking at it again (it’s probably been almost a year since I last viewed it) the thing that struck me most is how dated it now seems (the scenario just celebrated its 2nd birthday…); on the other hand, many of the themes are more relevant than ever, and some of it has even come true. (For those of you seeing it for the first time, some context can be found here and here.)

Here’s to 2015.

*****
A big big thank you to Malcolm. Without whom the Park Paradigm would exist only in my head.

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…but the hedge is so delightful…and since we’ve no place (else) to go…
WeatherBill, WeatherBill, WeatherBill

WeatherBill, the world’s only online weather risk management service, announced today the company has entered into an agreement with itravel2000.com, Canada’s largest online travel retailer, to provide coverage for Canada’s biggest travel promotion, “Let it Snow”. Under the terms of the agreement, WeatherBill will provide up to $100 million CDN in snow coverage, slated to be refunded to itravel2000 customers if it snows 5 inches or more at Calgary, Halifax, Montreal or Toronto airports on New Year’s Day , January 1, 2008.

“This partnership is a milestone in both travel and weather promotions,” says David Friedberg, CEO of WeatherBill. “Our significant risk capacity and simple, automated service for managing weather risk and promotions is the perfect solution for the large scale of ‘Let it Snow’. WeatherBill eliminates the time, expense and hassle of typical promotions - there’s no unnecessary paperwork, redemption process or waiting for payment. itravel2000 simply purchases coverage in increments to perfectly mirror customer sales, and there are no upfront set-up costs, administrative fees, minimums or maximums.”

Jonathan Carroll, President of itravel2000, said, “We’ve been looking for a partner to help us deliver ground breaking weather promotions for some time. We’re delighted with WeatherBill’s innovative solution and expect big results. The universal appeal of weather promotions and the excitement created by weather make ‘Let it Snow’ ideal. Best of all, itravel2000 is able to offer a generous ‘full refund’ to customers without typical rebate redemption burden. We can’t think of a better way to spread the word about our diverse, comprehensive and low-cost offerings, while thanking customers for their patronage.”

I wouldn’t be surprised at all to see more firms offering promotions linked to weather conditions. Travel, sporting events, gardening, outdoor events, etc. are obvious candidates for this type of marketing initiative. Watch this space.

And as an added bonus, it is great to hear that the Great White North is now covered with the launch of the new Canadian WeatherBill site.

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Last week something special happened in Tanzania. A moment in time. A jumping off point. (Say it softly…) a new future for Africa. The next chapter.

Over the past few years, a growing number of people in the TED community have become passionate about Africa, a continent that appears to be at an important tipping point. Its problems and challenges are well known. Less well known is that across the continent, change is afoot. Instead of relying only on development aid, Africans across the continent are beginning to take matters into their own hands. Ingenious solutions are being applied to tackle some of the toughest health and infrastructure problems. Businesses are being launched that are capable of transforming the lives of millions. New communication technologies are allowing ideas and information to spread, enabling markets — and governments — to be more efficient. And the numbers suggest that incomes are starting to nudge up in some countries and real growth is on the way. A new Africa beckons.

Last week I had the opportunity to attend TED’s second ever ‘Global’ conference. This time the focus was on the future of Africa and the setting was the lush mountains of northern Tanzania near the city of Arusha. The team at TED did what they seem to always do and produced an experience that exceeded the already high expectations (perhaps even their own!) The conference program was put together by Emeka Okafor; his blog - Timbuktu Chronicles - is a must read for anyone interested in African business and entrepreneurs.

One of the nice things about TED conferences, is that there is always a complete, rich and diverse conversation in the blogosphere reporting on, analyzing and extending the many presentations and conversations that happen at the conference, growing over time as the best presentations are released on TED Talks for the whole world to see. It doesn’t capture entirely the amazing energy that permeates the physical conference but nonetheless is a damn good consolation for interested people who didn’t have the opportunity to attend in person. For those of you that are interested, by searching for the tag - tedglobal2007 - on Technorati or other blog search engines, you will find a wealth of information, and in particular Ethan Zuckerman has written an amazingly complete and accurate blow-by-blow account.

Given this wealth of commentary and information out there, I just wanted to add a few thoughts on what I learned or (more precisely) what ideas I took away from Tanzania last week:

There is a new generation of young, intelligent and ambitious Africans that are determined to lead their countries and people to a better future, not through the bankrupt political and government institutions of the past but despite these institutions through enterprise, energy and talent.

There are a tremendous number of new and exciting business opportunities emerging all over the continent. The mobile telephony revolution is just the most visible of these; it is just the tip of the iceberg.

Perhaps the single most important missing element from the development equation is the lack of basic infrastructure: roads (transport), power (generation and distribution) and (internet) bandwidth. It’s not sexy but is nonetheless the foundation upon which a modern economy is built. Without basic infrastructure, efforts to improve health, education and productivity (especially in agriculture) will struggle to have any lasting impact.

There needs to be a greater focus on creating wealth (and I’m not talking about extracting rents from mineral and resource extraction in order to enrich some for some corrupt elite) rather than just reducing poverty. An important semantic distinction.

The debate around aid is complex; a dialog that recognizes this complexity and seeks to improve on the mistakes made in the past is to be welcomed. However, it seems clear that whatever the ‘right’ balance between aid and investment might be, there is currently insufficient private investment on the continent. Perhaps some component of western aid should be aligned to fostering (not subsidizing) more private investment, for example by mitigating the risks arising from the weak legal and institutional frameworks (as opposed to ‘business’ risk which is something that private capital is good at financing.)

To steal a line from JP, this is very much a provisional post - the beginning of a journey, not the certainty of the destination.

And if you want to listen to some of the ‘cheetahs’, here are links to a few of those I had the privilege to meet or hear speak at TED:

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