84 percent of executives say innovation is extremely or very important to their companies’ growth strategy. The results also show that the approach companies use to generate good ideas and turn them into products and services has changed little since before the crisis, and not because executives thought what they were doing worked perfectly. Further, many of the challenges—finding the right talent, encouraging collaboration and risk taking, organizing the innovation process from beginning to end—are remarkably consistent. Indeed, surveys over the past few years suggest that the core barriers to successful innovation haven’t changed, and companies have made little progress in surmounting them.

As I’ve written many times before, I think they are barking up the wrong tree.  They are trying to have their cake and eat it too which in the context of a traditionally organized (read 20th century business school optimal model) large company is like trying to pee in the corner of a round room.  ie Pursuing ‘non-linear’ innovation is not only difficult for these kinds of organisations, it actually requires a framework that is often diametrically opposed to the framework that governs the rest of their business, the business that actually pays the (current) bills.  And so it is entirely unsurprising that companies find it hard / impossible to assimilate this within their structures, culture and reward systems.  Perhaps paradoxically, one could argue that the better managed a large company is for its current/core business, the worse this disconnect;  in poorly managed large companies there is probably more room to roam “off the reservation” so to speak…  But I don’t think anyone – including me – would suggest that it would create overall value to manage poorly just in order to pick up a bit of innovation juice around the edges.

So what’s a big company to do?  Well I think they should look to invest some of their capital outside their walls.  Not corporate venture per se – the corporate antibodies end up killing / ensuring failure of dedicated corporate venture initiatives 9 times out of 10.  (A notable exception to this rule – the one of ten (hundred?) – is Intel Capital.  If you think your company can do this then go for it.  I personally suspect that one of the reasons Intel Capital managed to avoid institutional purgatory is that Intel has a very strong entrepreneurial culture and leadership (deep into the firm not just at the top) that had first hand memories of building businesses from the ground up.  Google Ventures may enjoy similar success for the same reasons…)  For the rest, I would suggest setting aside a certain amount of capital to make passive minority investments either directly or via specialist sector-specific early stage investors (like us if you are a financial institution, yes I’m talking my book) in companies innovating – especially in those using ‘non-linear’/disruptive approaches – in their markets.

Passive – meaning no board seats, no control – because the alternative would result in adverse selection bias or mission dilution/suffocation or both.  Adverse selection, because the best, brightest and most ambitious start-ups in your sector will not take your money if you ask for control and mission dilution / suffocation because if they do take your money and give you some control, your corporate antibodies will do everything they can to assimilate and/or crush what they will correctly see as a threat to the companies core business.

So why bother at all?  Why not just wait to see who emerges as winners and then buy them once the risk is gone?  Principally for two reasons (in order of importance):

1. Because you have to have a “position” to really harvest the informational value:  this is the trader in me speaking – anyone who has ever traded any asset knows instinctively that the difference between an ‘opinion’ and actually having a ‘position’ is huge.  Indeed any good trader who needs to follow any particular market closely – even if this market isn’t their first order concern and/or they don’t (yet) have any strong conviction – will take a small/nominal position in said market in order to ‘be in the flow’ and truly feel the rhythm of that market.  Put another way, picture the impact of an internal board presentation on top 10 new industry trends and 20 new companies ‘to watch’ vs a presentation of ‘this is how the 20 companies we have invested in are doing’ and tell me honestly that both will have the same impact…
2. Because you just might not get the chance to buy the winners – either at all (think Google, Facebook, etc.) or it will cost you very very dearly and worse you probably won’t have enough information to truely know / understand what you are buying (the most toxic manifestation of this is what I call the ‘panic buy’ – eg NewsCorp/MySpace.) In other words, the buy later strategy has it’s own set of very real risks.  And even when/if you do ‘buy later’ a company that you haven’t invested in, as a result of (1) above you will almost certainly be able to better mitigate some of these ‘buy later’ risks.

So why don’t more big companies do this?  I’m not sure.  Would be interesting if McKinsey would ask this question (they are more likely to get answers than The Park Paradigm, not sure I have a lot of Fortune500 C-suite readers!)  I suspect it is because the time horizons needed to be successful in such a strategy (5-10 years) far exceed the time horizons of most senior executives.  And related to this, that they are afraid – quite possibly correctly – that “Wall Street”/”the City” will chastise them for spending any money on ‘speculative’ investments,  that it is “not their job” and that they should “focus on their core”.  Funny however how the most successful executives and companies however manage to ignore the peanut gallery and pursue their plans with conviction and diligence.  Perhaps these are the companies who may listen and find value in my suggested approach…

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This apparent contradiction can be resolved. Financial markets do not operate in the same way as those for other goods and services. When the price of a television set or software package goes up, demand for it generally falls. When the price of a financial asset rises, demand generally increases.

Which explains why bubbles develop and burst and why ‘market fundamentalism’ does not generally serve us well when thinking about financial markets (as opposed to other markets.)  Buttonwood also alludes to the fact that bubbles often develop at times of great change (has he read Perez???):

Why not just let the markets rip? Some would say that bubbles tend to coincide with periods of great economic change, such as the development of the railways or the internet. Individual speculators may lose from the resulting busts but society gains from their overoptimistic investments. However, this argument is harder to sustain after the recent bubble in which society “gained” some empty condos in Miami and holiday homes in Spain.

His conclusion is that because of these structural characteristics of financial markets, central banks (and possibly regulators and/or governments) have a natural, pro-active role to play in trying to mitigate or counter these problems.

Of course a few investors – the most high profile being Warren Buffet – have successfully arbitraged this weakness in capital markets buy being countercyclical, being “greedy when others are fearful, and fearful when others are greedy”; but as most people know this is bloody hard to pull off and exposes the investor to significant liquidity/solvency risks if they get the timing wrong.   As Keynes said, “the markets can stay irrational, longer than you can stay solvent…”  If you have an edge, even a small one, doubling down will usually work as long as you have an infinite bankroll. Ooops, small fly in the ointment.  (Besides, if you have an infinite bankroll, what the hell do you need to bother about worrying about returns!)

Well I have neither an infinite bankroll nor the skills (and/or luck) to adopt a Buffet-esque investment strategy.  But I do have some skills.  And some experience.  And I can recognise patterns reasonably well.  And I have conviction.  And a reasonable track record for building new markets and adopting and executing novel business models.  So a few years ago I figured out that by focusing these modest talents and skills on investing in and helping to build new businesses, with a lot of hard work and days and months of research and reading I could generate pretty decent financial returns that were (almost) completely uncorrelated with the massive tides that buffet the world’s financial markets.  And most importantly, this lack of correlation is structural – ie it doesn’t disappear in violent bear markets when almost all mainstream asset classes discontinuously jump to near perfect correlation (much to the chagrin of the VaR boys.)

It’s not hard to understand why.  In fact it’s pretty obvious.  For a new business, the ups and downs of the market, GDP, etc. have at best a second or third order effect on the company’s value.  These factors are overwhelmed by the single most important factor driving value creation which is of course, can the company successfully sell it’s products or services to paying customers (or be more and more clearly on that path.)  As someone wise once said:  a “start-up is not GM”  ie They are not correlated to GDP.

Now don’t get me wrong, I’m not suggesting that investing in new companies is without risk.  In fact as most people would glibly observe, investing in start-ups is ‘very risky’.  Well yes, but the risk is almost entirely idiosyncratic and manageable – much much less dependent on vast, uncontrollable, macro-economic trends and forces.  And just because the risks are easier to identify and name, doesn’t mean it is easy to manage them, just that they are potentially (more) manageable.

So if this is true, why have venture capital returns generally been so poor (at least in the last decade or so) and why don’t more smart people try their hand at this (rather than trading/managing other types of assets)?  Answering the second question first, I suspect this is because failing together is much nicer than failing alone, and so if the global financial crisis wipes out your hedge fund or investment bank or savings, well that sucks but, you know, shit happens.  If however you pour your own (or worse your investors’) capital into a couple of dozen new companies that crash and burn, well that’s just a very lonely place to be.  The answer to the first is not simple and you could probably write a book on this (perhaps Paul Kedrosky will?) but with the disclaimer that I don’t pretend to really know, my short and dirty take would be that there are two related factors at the heart of this failure.  First, investing in new companies is hard to scale – at least compared to many/most other asset classes and secondly, the traditional structure of the industry is poorly adapted to this reality.  Private equity legal and economic structures (which is how most venture partnerships are structured) doesn’t really fit the risk/reward/resource profile needed to invest successfully in new companies.  Of course their are exceptions – both temporal and human – but just because their are some investors clever and/or lucky enough to make it work doesn’t make it right.

I could of course be wrong.  And I could fairly be accused of hubris, especially as at this point I don’t have a long enough track record and/or enough exits to prove without doubt that my approach is correct.  And while I am confident in my own abilities and have backed that up with a lot of “skin in the game”,  I am even more confident in my larger analysis that while the venture capital industry might be broken / poorly organized, the risk-adjusted returns available to those who chose to invest – methodically and with a well-calibrated capital and incentive structure  - in new companies, are excellent and, for the VaR-boys out there, truly uncorrelated to mainstream asset classes.  The challenge is of course to find these investors and not to swamp them with too much capital.  This problem isn’t solved but it looks a hell of a lot like the problem facing hedge fund investors (in most strategies that also do not scale beyond certain amounts of capital) and the asset allocation community would do well to try some of their more successful solution there on finding and seeding managers in this asset class.

And if you ask me, the rise of the ‘super-angel’ much talked about in venture circles these past months, is a step in the right direction and perhaps an indication that asset allocators are (finally) waking up to this opportunity.

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Today I had the opportunity to be on the other side. Presenting our CiRX idea at mini-seedcamp London; attending as a ‘founder’ and not an ‘investor’ or ‘mentor’ for the very first time. And it was totally worth it. Not only was it valuable in the normal / traditional ways that seedcamp can help a founder but interestingly – although not altogether surprisingly – as an investor, it was very enlightening to sit on the other side of the table for once. I learned a lot. About CiRX of course but also about how a founder perceives the world (as opposed to an investor.) The only regret I have is that I don’t think I did a very good job of being mentored, especially with some groups and wish I could have another go. (Basically I talked too much. I know. Shocking.) Partly because well, I unfortunately do that sometimes, sorry. Partly because at almost a subconscious level, while I was supposed to be the mentee, my default tuning in this context is to be the mentor so sometimes I perhaps did both! And partly because I haven’t yet nailed the best way to succinctly articulate the value we see in the CiRX proposition.)

This last bit was a great takeaway because even though I probably knew that before, I definitely know it now and having muddled through a half-dozen live sessions has already now given me some ideas of how to better describe and deliver the value proposition of CiRX. Indeed it was funny to fall into the exact same trap I’ve (patronizingly? hope not!) warned so many founders about myself: ie to remember that 99% of the people you will speak to about your vision haven’t spent the last 6 months bathed in it and so the threshold of obviousness is much much higher than you think it is. What you take as given, is anything but to most people you will meet. In any event, I would highly recommend that anyone investing in early stage companies walk a mile in those shoes. A bit humbling, but more importantly very enlightening.

I’d like to thank all the mentors whom we met and really underline how much we appreciated their forthright opinions and incisive analysis. Farhad and I got a lot out of it and I suspect that we will tweak our plans based on some great insights and suggestions we received throughout the day. Also at the risk of sounding a bit soppy, I’d really like to publicly thank Reshma and Saul for the incredible job they have done building the seedcamp community and ecosystem. I am reminded of the summer of 2007 when I made a rash decision to invest in this new thing a guy I barely knew named Saul (who admittedly had come highly recommended) was organizing and thinking now what a terrific investment that has been. And that’s before getting any of my capital back!

Finally, I just have to say how impressed I was by the quality of the other teams that were invited. Really really impressive. Not so many in our investment space (although Subsify is a company that caught our eye and we’ll be interested to learn more about) but the two that really stood out for me were Editd and Memrise. Would be very surprised not to see these two make it through to seedcamp week in September. Eyequant too.

As for us, well we certainly have a lot to digest and a lot to work on…but that’s exactly what we hoped for.

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• Mini Seedcamp: highlighting Europe’s young digital entrepreneurs (guardian.co.uk)

A bit of background.  When I was in banking, one of the achievements I was most proud of was effectively using web technology to transform how (debt) capital was raised (at least in Europe*.)  At DrKW, we built what for many years was the state of the art capital raising platform, whose core product was our eBookbuilding platform (now in Commerzbank yellow!)  It completely revolutionised what had heretofore been a disjointed, manual, somewhat ad hoc process into a seamless, collaborative, mostly painless process.  Initially it met with enormous resistance from other (much bigger and more successful) banks and syndicate managers, who as ‘guardians of the temple’ jealously guarded their power, derived (in their minds) from the information asymmetry they enjoyed (vs issuers and investors.)  However – and despite being at best a middling player in the fixed income new issues market – our disruptive technology was such a big improvement on the status quo that eventually the market adopted our standards (with everyone then rushing to build their own analogous platforms.)  In the spirit of making sure these platforms could ‘play well together’ we even published our XML-Schema for new issues and invited all our competitors to contribute to it and use it. (Which had the effect of basically freaking out our competitors.  They thought we were crazy – like Ali – because they didn’t have the slightest idea what it means to compete in a world of information abundance and platforms, but that story is for another day…)

Anyhow, when I became seriously and then professionally active in ‘venture capital’ or more generically speaking, in investing in private companies, the lack of technology available to manage workflows surprised me;  I was particularly puzzled because ostensibly this was a world populated with techophiles, early adopters and people who ate disruption for breakfast (quite unlike the world of institutional capital markets).  Further, there is much talk (and consensus) around the fact that it is hard/impossible to scale venture investing.  And while I think this holds at some level, it struck me that a significant number of the gating factors limiting the ability to scale could be vastly improved.  Not to infinity but substantially, perhaps by an order of magnitude.  Pulling out an example from my old career, when I started life as a bond trader 20 years ago (ack!) the number of bonds that a typical good trader could manage numbered in the dozens at best (and even then, you would find that a trader really traded 10 to 20 bonds 80% of the time and sort of went through the motions for the other bonds hoping most of the time not to trade.)  Then came Bloomberg.  And excel spreadsheets.  (And later bespoke pricing and analytic tools and platforms.)  And all of the sudden, a trader could manage a book with hundreds of securities.  There was still a degree of 80/20 but everything was an order of magnitude bigger.

I don’t know if our new initiative will definitely achieve that degree of change in the private investment market, but we are convinced that there is a better way and having a fit-for-purpose platform to help company management, non-executive directors and investors communicate, collaborate and manage their positions and responsibilities would be a huge step forward.  It’s not that nothing currently exists, but I would say we are at the ‘excel spreadsheet’ phase to use my bond trading analogy – with many firms and people starting to use things like Google Apps or Basecamp and the like to better manage information flows and collaboration.  But while this (and excel for traders) is (was) a good start, the real juice comes when dedicated, purpose-built platforms emerge.  If you have a screw that needs driving, a hammer is better than nothing (or a rock) but a screwdriver is even better!  (A power screwdriver better still!)

So we conceived of (what has been provisionally named) CiRX – the corporate director and investor relations information exchange:

CiRX is a purpose-built platform enabling private companies, directors and investors to communicate and collaborate more efficiently saving time, money and effort.  By streamlining processes and connecting stakeholders in an intuitive and context-rich environment, CiRX offers a tailored yet consistent solution to the challenge of managing information and documentation flows, reducing administrative burdens and creating opportunities for a richer, more dynamic and flexible approach to corporate governance and strategic management.

Over the past few months, we have been developing the concept, the business model and have done a significant amount of macro research to identify the potential size of the market opportunity and now have started to take the next step and ‘talk/think details’ as they say.  In order to support this next stage of development, as we are poised to start ‘cutting code’, we wanted to get more direct feedback from the community – of company executives and founders, non-executives, angel and institutional investors – to better understand how their experiences and perceptions were both similar and different to our own.  To do so we created a short(ish) survey and have sent it to a number of our contacts across all these communities, but if we missed you and you are a company founder or non-exec director or investor in one or more private companies and you are interested in contributing your views, you can find the survey by clicking here. (We’ll leave the survey open for a couple weeks probably but if you are so inclined to complete it, we are excited to be presenting CiRX at mini-seedcamp London next week so would be great to have as much feedback as possible before then.) Of course you are also welcome to share your views – good, bad and ugly – in the comments below.

* That e-bookbuilding (generic) never gained acceptance in the US (at least not while I was still in the market) is in my opinion a telling manifestation of the oligopoly of Wall Street (which gives us things like 7% IPO fees with the spooky consistency of North Korean election results) which absent the pressure of competition, allowed the dominant underwriters to resist this change tooth and nail.  It was even more glaringly apparent when these same US firms operating in Europe adopted e-bookbuilding as strongly as everyone else once it was obvious it was an evolutionary winner…

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So what would just right liquidity look like?  Can you have your cake (all the typically enormous strategic advantages that accrue to a private company) and eat it too (the advantages of being listed, afforded by having a periodic mark-to-market and the ability to use your equity as a real currency)?  I think you (mostly) can and am very encouraged to see this sweet spot slowly emerging and gaining traction outside of a handful of what previously would have been considered exceptions to the rule.  In my opinion, the answer (as I have mentioned before) lies in further developing secondary markets in private company equity.

The two most successful companies I have had the privilege of investing in – Markit and Betfair – despite being multi-billion dollar companies and market leaders, are still today private companies and have provided liquidity to investors, management and employee shareholders (in different ways) which has gone a long way to allowing them to remain private and reap the associated benefits.  The flexibility of Facebook’s management to run their company for the long term optimal outcome has I suspect been a direct function of the liquidity that secondary investments (from DST) and a relatively active secondary market in Facebook shares on platforms like Second Market and SharesPost have provided to early investors and employees.  And it’s not just about cashing out – at least half the value of these secondary markets comes from providing a credible mark-to-market and the reasonable expectation that – if needed – an investor could access liquidity.  Perhaps paradoxically, with these two factors in hand, more often than not, investors will actually have a higher propensity to hold on too their investment, not lower.

Another benefit of secondary markets would be to improve the health of the overall venture investment ecosystem which while evolving in fits and starts, most recently with the rise and rise of “super-angels” and “seed funds” still mostly remains in the eyes of this industry outsider, static and prone to herding around the notion that one-size-fits-all in terms of capital structure and financing paradigms is somehow optimal and should not be questioned.  In particular, I fail to understand why the received wisdom of the venture capital community seems firmly stuck on the concept of “nobody exits until everybody exits”.  It’s a dumb concept and worse, quite frankly is at odds with the interests of the various investors and stakeholders in a private company,  including later stage investors (aka mainstream venture capital funds.)  I believe much of the angst surrounding seed stage investing and (traditional) venture capital investing, arises as a result of a dysfunctional transition mechanism. (ie There isn’t really one.)

What I would like to see – and quite frankly have never heard a good counter-argument against – is a more dynamic and flexible financing chain, one that pragmatically combines both primary and secondary elements.  Practically speaking, what would this mean?  At its simplest, it would mean that at any given funding round, the possibility of existing investors exiting part or all of their holding is considered objectively and without undue emotion.  Having participated in many such transitions in companies going from “seed” funding to “series A”, or “series A” to “series B”, etc. the relationship between existing shareholders and the new shareholders is far to often one of conflict – to the extent that this is often seen as just the normal way of things – when there is no reason that this ever need be the case.  Venture capital firms often talk of “needing” to invest a minimum amount of capital and/or “needing” to own a certain minimum stake in the companies they invest in.  While I think the case is sometimes overstated, if you understand the dynamics of their business model, their attitude is easily understandable and basically rational.  And yet, I have never yet seen a venture capital fund offer to buy-out the early stage investors in whole or in part when more often than not this would be an ideal outcome for everyone:

• the company:  not needing to raise more new capital than strictly necessary
• the early stage investors: (whether professional angels or seed funds or friends and family) allowing them to reduce risk, recycle capital and retain focus on the market segment (early stage) they know best and which corresponds to their capital base
• the venture capital funds:  allowing them to simplify the capital structure, deploy more capital and ease negotiations

If this became the norm, I think it would drive a massive downstream benefit which would be to create a more dynamic, focused and intelligent early stage investment paradigm as investors in this ecosystem niche could really focus on funding two types of companies:

• companies that have a plausible case to become successful but modestly sized businesses worth $10-40 million; and
• companies that have a plausible case to become “VC fundable” where the goal is to exit in a series A or series B at $10-40 million

This would considerably improve both the availability but also the quality of early-stage capital as the risk / return dynamics would become much less random and the impact and velocity of the best investors in this space would increase considerably, providing more, cheaper and easier access to capital to entrepreneurs while at the same time providing a fantastic “farm-system” of talent and corporate development to later stage VC’s, perhaps even allowing (the best amongst) them to deploy their hundreds of millions or billions of capital efficiently as their ecological niche becomes better defined. I am absolutely convinced that this paradigm would create a much healthier, more vibrant capital market for innovation and disruption, improving returns for everyone in the ecosystem.

What I am not saying is that buying out seed investors would be appropriate in every situation.  Nor that all seed investors would always be happy to sell all or even part of any individual investment.  Nor that later stage investors should always look to buy out early stage investors.  What I am saying is that this discussion should always be a part of the financing tool-kit, this option should always be on the table, and dismissed only when and where it is objectively inappropriate.  Let’s get rid of the dogma and let markets work.  Liquidity:  not too much, not too little, let’s get it right!

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Busy investing in a whole bunch of super exciting and interesting new businesses. Busy working on the sale of ODL Group (where I was the lead independent non-executive director) to FXCM to create a true global leader in FX trading. Busy working with my partner Uday and FT Advisors on a number of interesting strategic advisory projects, in particular focused on the electronic and algorithmic trading space. Busy helping two of our portfolio companies raise follow-on financing. Busy working on our own corporate structure and capital raising where I hope to be able to communicate some exciting news in the not too distant future. Busy.

So what have we been investing in? Here is a quick rundown (in alphabetical order):

• Babuki – 2008 seedcamp winner, launching soon (will update) with an innovative platform for social gaming
• BankSimple – “an easy, intuitive, and social bank for people who appreciate simple online services. Unlike other banks, we don’t trap you with confusing products nor do we charge any hidden fees. No overdraft fees. We use sophisticated analytics to help you better manage your finances by providing you a individualized service, catered to your needs and goals.” Recently got some attention when they announced that Alex Payne of Twitter fame has joined as CTO. They also got a great write-up from @maxableson in the NY Observer.
• Blueleaf – investment information management and planning software “to help people like you see all their savings and investment accounts in one place; understand their financial information more completely, more quickly; securely share information and collaborate with spouses, family or advisors; save their data, even if they change financial institutions; and maybe most importantly, help them stay financially safe and secure.”
• Timetric – builds services to make sense of time-series statistics, based on the Timetric Platform: a proprietary service for publishing, analysing, and performing calculations on very large quantities of time-varying statistical data. Have a look at this neat little demo website they have built for tracking equity portfolios.
• Metamarkets – provides global, real-time media price discovery by aggregating billions of electronic media transactions in order to deliver dynamic price data, proprietary price and volume aggregations, and comprehensive analytic media market views to sell-side media principals.
• [not yet closed - will update soon]

Over the next few weeks or so, I plan to do a proper write-up on each of these businesses and the reasons we think they have bright prospects. So watch this space.

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• Fixing finance. (parkparadigm.com)

To be able to succeed (in providing meaningful, affordable, services) in such challenging environments to my mind offers great insights into how improvements can be made to how services are designed and sold in any environment – including the developed and wealthy western markets. A variation on the New York, NY theme of – ‘if you can make it here, you can make it anywhere’…

And so this post: “…and you will hear our voices” from Teddy Ruge really resonates:

So what does this really mean for us as an ever-increasing population empowered by the social media stage? It means we have the responsibility to start speaking up for our continent. We have right to say enough is enough with the hand outs, enough with the aid mentality, enough with the top-down solutions, and enough with being ignored on the global stage. Our voices count, and it would be good to partner with us—to have a conversation with us first—before any projects are started.

I would go further and say it would be insane not to partner with the people that are “at the coal face”. That not only would this reduce the number of mistakes, failures and unintended consequences but that the opportunity for learning and cross-fertilization of ideas, business models and innovations is so rich that to ignore it would simply be foolish. Social media is giving a voice to ideas from everywhere, anywhere, with the best ideas emerging naturally based on their intrinsic worth and evolutionary strength (and not because of where or by whom they were ‘invented’.) So for talented, ambitious people everywhere the cry is no longer “Go west young man!” but “Go south, go east, go north, go west – go into the global social ecosphere and connect with the current of humanity.” Open. Not closed.

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There’s nothing more valuable than an unmet need that is just becoming fixable. If you find something broken that you can fix for a lot of people, you’ve found a gold mine. As with an actual gold mine, you still have to work hard to get the gold out of it. But at least you know where the seam is, and that’s the hard part. - Paul Graham

In the latest of his series of great essays, Paul Graham makes the obvious – but all too often overlooked – point that one of the best ways to create value is by working to “fix things that seem broken.” He also highlights the fact that sometimes it pays to step back from your daily environment to get a clear picture of what is broken:

You may need to stand outside yourself a bit to see brokenness, because you tend to get used to it and take it for granted. You can be sure it’s there, though. There are always great ideas sitting right under our noses.

At the end of 2006, after a long, successful, and mostly exciting and enjoyable career in capital markets I took that step outside. And my suspicions became convictions. Finance seemed broken to me. And it bugged me. It still bugs me. It bugs me when super smart people (who aren’t financial or market professionals) resign themselves to accept crappy advice and ill-suited products and services when it comes to their finances. It bugs me that so many bright, energetic, ambitious people working within the financial services sector continue to be trapped in the status quo of 20th (even 19th) century business models, their talents misdirected when the alternative is so much more appealing.

And so I thought I should try to fix it. Not all of it. Not all at once. But more than just a single facet. I haven’t got it all figured out yet, but I think I’m headed in the right direction and most importantly I’ve learned more – about the industry, about people, about building value and about myself – in the past 3 years than in the 10 before combined. I’ve never worked harder and I’ve never had more fun. And I’ve met some pretty amazing people too.

A few days ago, Fred Wilson commenting on the (ridiculous) inclusion of venture capital in the financial stabiliy bill wrote this:

The only systemic risk the VC business is creating for the financial system is attempting to put the current one out of business by financing entrepreneurs with new ideas for banking, brokerage, insurance, and other financial services. I’m not joking about this. I believe entrepreneurs will use technology to reinvent the way financial services are provided to consumers this decade.

“Using technology to reinvent the way financial services are provided to consumers this decade.” Nice. In fact that is our elevator pitch. I just hope Fred doesn’t mind if we use it.

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• Venture Capital Creating Systemic Risk??? (myventurepad.com)

RabbitMQ was born of a JV between CohesiveFT (my partner Amy sits on their Board) and L-Shift and was spun out as an independent entity under Alexis’ leadership about a year ago. The mixed feelings I alluded to above are only because we were quite excited by the prospect of helping Rabbit grow as a standalone business, given their already excellent market share, the existing and extremely fast growing market for their product (messaging), the already strong brand and market adoption of RabbitMQ and a number of successful open-source business model pioneers and exits to emulate. As we did not have the capital required to make this happen we could not put a credible alternative on the table. To be fair, there were always a lot of moving parts and there is no guarantee that we could have put a better, workable deal forward and clearly joining the VMWare family is an awesome opportunity for the company and the team.

In any event, I’m really excited and happy for them and proud to be associated with them, even if only in a small way. Here’s to hoping this is a homerun deal for VMWare! (And yes having “Rabbit” in your name is one of our investment criterea…)

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Now, though it maybe hard to predict what innovations PayPal’s platform will enable, it’s safe to say that the payment industry is going to change dramatically. As money becomes completely digitised, infinitely transferable, and friction-free, it will again revolutionise how we think about our economy.

The author talks excitedly about PayPal’s new open platform X.com and how it is poised to change the current payments landscape which continues to be dominated by the credit card companies. PayPal launched this new approach late last year with their first developers conference Innovate09. Here’s what PayPal President Scott Thompson had to say about the conference:

As you might imagine, given my views on both the enormous opportunity that exists to disrupt an increasingly anachronistic financial services industry and my enthusiasm for “platform-based” business models, it is quite satisfying to see someone like PayPal take on this opportunity in such an aggressive manner. Not only do they help to validate the opportunity – bringing both human and financial capital to bear – but they can capture the attention and imagination of a generation of engineers and entrepreneurs in a way that we simply could not (at least not yet), even if we had a very large amount of capital to deploy. And that can only be good news, except perhaps for the management and shareholders of dominant incumbents like Visa:

“What we witnessed was truly a perverse form of competition,” said Ronald Congemi, the former chief executive of Star Systems, one of the regional PIN-based networks that has struggled to compete with Visa. “They competed on the basis of raising prices. What other industry do you know that gets away with that?”

Of course payment networks are classic “two-sided” markets, with strong natural tendencies towards monopoly providers (due to strong network effects and high barriers to entry. Further the structure of these markets allows providers to levy charges on only one side of the market (merchants) while seemingly offering the other side a free or inexpensive service. Last fall The Economist explained why, in such a market, regulation is often ineffective and can often actually produce worse outcomes in some cases:

The case for tight regulation seems strong, at first glance. In rich countries, where paying by plastic is now commonplace, the firms that run card-payment systems look like other utilities, which have long been subject to price caps. Visa and MasterCard are associations run on behalf of their member banks. Competition officials are usually wary of such shared ventures but accept that it is more efficient for rival banks to band together in one network in order to process payments and settle accounts. A common fee structure stops members from abusing the rule that retailers must take all cards issued with the association’s brand. It also obviates the need for countless bilateral deals between thousands of banks. Even so, regulators still fret that banks might use their combined heft to overcharge.

They need to tread carefully. Judging how much credit-card firms ought to charge for their services is trickier even than setting the right price for water or energy supplies. That is because the payment-card system is a “two-sided” market. What sets this type of enterprise apart is that it caters to two distinct groups of customers and each sort benefits the more custom there is from the other sort. Consumers will sign up for a credit-card brand if it is widely accepted as a means of payment. Merchants will more willingly accept a card if lots of consumers use it.

In my opinion, the best way to ensure good value to all the participants in the payments value chain is to encourage and facilitate competition: new approaches, new ideas, new entrants. PayPal has long been the poster-child for “start-up” innovation in financial services, but had seemed to have lost its way in stuck in the corporate bureaucracy of eBay. It’s great to see them breaking free of that and striving to re-ignite their creative and entrepreneurial juices. (Although I still think they would probably be better off independent of eBay…even better, how about a merger of an independent PayPal and an independent AWS: now that is a stock I would love to own!)

For several years now, it has been dead obvious to me that new and exponentially improving information and communications technologies would create the foundation upon which bright, ambitious entrepreneurs would build new companies and business models that will disrupt the moribund incumbents and their 20th century business models. And that’s why I started Nauiokas Park. We’ve made some good decisions along the way, and we’ve learned a lot. But one thing we got spectacularly wrong was our naive belief that leading incumbents in the financial services sector would embrace our vision and our proposition as an opportunity to hedge the strategic risk of continuing to rely (exclusively) on their existing business models. That they would look at the management failures and massive value destruction suffered by the traditional media and telecommunications companies and look to deploy multiple strategies to mitigate the risk of being caught unawares in the same way. But it would seem that they are uninterested. A toxic cocktail of hubris, myopia, inertia and institutional politics seems too often to blind them to the risks posed to their continued hegemony. As if admitting Christmas exists – let alone voting for it – would make it’s inevitable arrival more likely.

Gobble gobble.

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