Today Markit Group announced that General Atlantic has invested $250 million, valuing the 7 year old company at a whopping $3.3 billion. Founded by Lance Uggla, Kevin Gould and Rony Grushka in 2003 to address the growing need for quality data in the burgeoning credit derivatives market, what followed was several years of unbelievably good execution and disciplined acquisitions which has positioned the company as a critical component at the heart of the trillion dollar OTC derivative markets. The products they provide aren’t considered sexy (something that is often given all too much importance in this status conscious industry) – but their data, valuations, indices, trade processing and other products and services are the plumbing that is key to the continuing operation of many financial markets. They are a great example of creating value by building a great platform and understanding how to monetize data. I had the good fortune to be a non-executive director from 2003 to 2006 and I can say without hesitation that this team is one of the best I’ve ever seen and fully deserve the success they have achieved. (Congratulation guys. Awesome, truly awesome.)
And I am certain there is more to come. Their primary constraint has and will likely continue to be the physical/logistical limitations of growing as fast as they have but each year they only improve and in terms of acquisitions the company they most remind me of (in terms of disciplined and deliberate execution) is Cisco. Besides, General Atlantic doesn’t invest in companies where they don’t think they can make 20-30% annual returns or more.
And yet many (most) people in the ’start-up’/'tech’ scene whether in the UK or the US have never (or only vaguely) heard of Markit. (For example, I counted only about 50 or so tweets referencing the announcement today, less than for any TechCrunch launching start-up…) Why is that? Obviously I can’t say for sure but (in no particular order) would guess the explanation perhaps lies in the following:
not venture capital funded; funding initially came from it’s cornerstone customers, the investment banks, and then later from some very smart hedge funds
focused on the wholesale financial services industry (and not on consumer or media or other mass markets)
key products and services (and associated economics) unknown to those outside finance and even worse generally considered ‘boring’
management team laser focused on execution, not PR (although to be fair they had this luxury not needing to sell to the mass market)
and so folks like TechCrunch and VentureBeat don’t know or write about them (aka “if a startup isn’t listed in CrunchBase does it really exist?” syndrome)
Indeed for me, Markit is a poster child for the cognitive, cultural and expertise chasm that exists between ‘Wall Street’ and ‘the Valley’ (or the ‘City’ and the ‘Roundabout’ to use the less good UK-centric metaphor.) They might as well be on different planets. Indeed bridging this divide is at the core of what we set out to do at Nauiokas Park and was the driver that led Paul Kedrosky and Tim O’Reilly to launch the Money:Tech conference in 2008 (which sadly didn’t survive the financial crisis and quite frankly was met by a deafening indifference by the vast majority of the Wall Street side of the equation.)
And yet, the opportunities available to those who can successful bridge this gap are enormous. Well, anyway that’s what we think. And the crisis in venture capital ostensibly caused by too much capital? I’m going to disagree with Paul and Fred and suggest it’s not too much money overall; rather it’s too much money concentrated with too few investors, focused on too few sectors, who end up all chasing the same deals. So to the LPs out there my message would be: don’t shrink the pool, enlarge the opportunity space. Oh, and try to make sure you’ve got exposure to the next Markit Group.
AmazonJP Morgan, displaying a sense of urgency that is perhaps driven by the pending launch of Apple’s tablet-style computeranti-trust legislation which will end the US banking oligopoly, is turning its Kindle devicebanking and payments infrastructure into a platform. The SeattleNew York-based company has announced that it will allow software developers to “build and upload active contentapplications” and distribute it through the KindleChase Store “later this year.” AmazonJP Morgan will be giving out a KindleChase Development Kit that will give “developers access to programming interfaces, tools and documentation to build active content innovative financial services and products for Kindle.Chase” The company will launch a limited beta effort next month. From the press release:
“We’ve heard from lots of developers over the past two years who are excited to build on top of KindleChase,” said Ian Freed, Vice President, Amazon KindleBo Nusmore, EVP, JP Morgan Chase. “The KindleChase Development Kit opens many possibilities–we look forward to being surprised by what developers invent.”
Vertically integrated black box? Or open platform? Which type of bank makes for a more robust system? Which type of a bank is more evolutionarily fit to compete on a level playing field? I know that their is an enormous moat protecting large financial institutions from competition but I would hope they would be using the super-profits that this affords them to prepare for the day the moat is breached. And perhaps behind the parapets they are. Because I pretty sure there are an increasing number of very clever, ambitious (and even angry) folks starting to congregate on the edge of that moat and while it might take some time and a dash of luck, it would seem certain that eventually they will be inside the castle. And then, it just might be too late.
I’ve been avoiding putting together a list of predictions for 2010 (more on that later) but just couldn’t resist suggesting that 2010 could well be a breakout year for weather risk management. All of the conditions necessary have finally started to come together and with the worst of the 2008/2009 hysteria behind us (without passing judgement on the future direction of markets), companies (and hopefully individuals) will start to wake up and respond to the risks and opportunities inherent in weather variability. I wouldn’t be surprised if weather risk was one of the top three risks faced by the vast majority of (non-financial) corporations, perhaps even the most important risk in some cases, and of the same order of magnitude as liquidity, foreign exchange, commodity and interest rate risk – all risk categories for which massive global markets in risk pricing and transfer exist. Weather in this regard remains significantly underdeveloped:
(via Ben Smith, First Enercast Financial) For example the Department of Commerce estimates that more than $1 trillion of U.S. economic activity is exposed to weather. Even if a small fraction of new risk is hedged through derivative contracts, 2010 will be a very good year for these markets.
The massive costs incurred in much of the northern hemisphere over the last few weeks due to heavy snowfalls and cold temperatures are just one more example of how important a factor in economic outcomes weather risk can be. For example, just take the exceptional – and uninsured – costs incurred by local authorities and airport operators across the UK for snow removal, sanding, salting, loss of revenues, etc. Previously, a manager of a company (or government entity) who suffered an exceptional weather-related loss could shrug their shoulders and plausibly say “it was out of my hands.” In a way that would be impossible if for example their organization suffered a massive loss because their buildings or equipment perished in a fire and they were not insured. In that scenario, shareholders or taxpayers would be incandescent with rage at the incompetent risk management of the managers. Not managing weather risks is no different in substance (now that appropriate weather insurance and derivatives are increasingly widely available), only remaining so in perception as awareness lags.
Of course I am biased, having invested in Weatherbill, which is at the vanguard of transforming weather risk markets:
(via J. Scott Mathews, WeatherEX LLC) The weather market was built upside down, which is quite a feat, even for financial engineers. What we mean is that it started on the wholesale level without any retail underpinnings. It started out like a castle in the air…The changes coming in 2010 for the weather derivative market will be keyed “from the bottom up.” Solutions companies such as Guaranteed Weather and Weatherbill who bring management choices to “ground level” risk holders are helping to complete a strong base to keep that castle from crashing on us.
The difference between weather derivatives (Weatherbill.com) (or any other new risk management tool) and say books (Amazon.com) is that risk management tools need to be ’sold’ – there is a learning curve, however shallow; and while most people instinctively understand and can conceptualize their weather risks, their survival instincts – honed by decades of doing business with rapacious financial services firms – and fear of ‘getting their eyes ripped out’ means that they are understandably cautious when considering using weather risk management instruments for the first time.
This is where Weatherbill’s business model I think is particularly well adapted to the opportunity: on the one hand, they have a very modern (open) approach to pricing: anyone can go to their website and play around in their pricing ’sandbox’. Try doing that ten years ago when you wanted to price up a complex FX or interest rate option. Basically it was build your own model or keep sending pricing request to your favorite sales person (who would then have to go beg the trader for a price, and in addition to the regular parameters, the client’s identity, the salesperson and the trader’s mood would also be imputed into the price. That is of course if he felt like making one.) On the other hand, (and this is something that has evolved over the past couple years) Weatherbill has aggressively sought out distribution partners – insurance brokers, industry platforms (eg travel sites), etc. – as trusted providers to their respective customer bases, they are ideally positioned to help their customers manage their weather risks by leveraging Weatherbill’s platform. I first wrote about this a few months ago, and since then they have signed up a number of new and significant partners.
I love skiing and my family take a season pass at Les Trois Vallees. Obviously weather risk is central to running or enjoying a ski resort. While there are many different types of risk you could look at in the context of a ski resort, in the interests of simplicity (ease of understanding/customer acceptance) and maximum pain relief, there are two risks that I would have loved to have had an embedded hedge for in our season ticket (and I suspect the same would go for someone buying a week-long pass for their holiday, in fact they would probably be even more sensitive/appreciative.)
Not enough snow to ski risk: ie not that the snow is great or this or that…the basic risk that the pistes are closed. For most modern ski resorts this is actually a function of temperature and not precipitation, as they use snow-making machine to lay down a base. Temperature risk is much easier to measure and price (than snowfall) and has much lower geographic variability ie you don’t need a weather station on every piste on the mountain.
Rain risk: ie the only time it is absolutely unpleasant to ski is when it is raining. Also, rain typically doesn’t help the existing snowpack, making skiing after rain often unpleasant as well.
Using Weatherbill to hedge their risk, Les Trois Vallees could offer a ski-pass that reimbursed me for every rainy day and for every day say less than 80% of their runs were open due to lack of snow. In an age of increasing climate uncertainty (or perception thereof) I am 100% certain this would help them market (and sell more) season tickets. And for week-long tickets, it would be a great marketing tool for advance sales (with significantly positive cashflow benefits), and great for improving the user experience. Imagine a vacationer whose week in the Alps is ruined by 5 days of torrential rain…getting their money back on the lift tickets (irrespective of whether or not they braved the elements) would go a very long way to having them consider giving it another try next year.
Of course this is but one example, I’m sure all of you can think of hundreds more. In fact it might be harder to think of services or businesses that are completely immune to the weather. So really, what are you waiting for? Start hedging!
One of the downsides of having a reasonably ‘international’ life is having to manage foreign exchange risks and effect international currency transfers and payments reasonable regularly. If you only do this once every few years for a few thousand pounds/dollars/euros/etc., you may not notice or care that your bank generally makes this quite hard to do and charges you an arm and a leg for the pleasure (no commission is just dishonest marketing-speak.) If however, you need to make a few foreign currency payments or transfers each year; and/or you have more significant sums at stake, your bank is probably not the best place to do your FX business.
You could (and perhaps do, as I did) use one of the literally hundreds of FX brokers, and if you have the time, knowledge of spot rates and inclination to haggle and shop around, you will get a good price. For a transfer of £10,000 for example you could easily save on the order of £100 or more compared to your bank. However (aside from needing the time, skill and energy to haggle and shop around), in my experience that is the easy part. It is only once you have traded that the fun really starts. Faxes, printing pdfs, clunky websites… getting your money to the broker and then back out in the new currency to the destination account is all too often a long and painful experience. Not completely surprising given the traditional business culture found in financial services: the trade is done (and revenue is booked), the rest is just ‘back office’, paperwork…boring. But from a customer point of view, this is upside-down: the trade is the easy part, undifferentiated, relatively painless (notwithstanding the see-what-you-can-get-away-with pricing algorithms of most of the industry.) Your time (and mental health!) is valuable, being able to trade painlessly in just seconds is often times as valuable or more than a tight price. In any event, you shouldn’t have to choose between them, and now you no longer need to.
So when an ex-colleague of mine Nigel Verdon came to me with a new concept in FX payments and broking, one that was predicated on transparency, simplicity and automation, I listened. I liked what I heard and I became one of the first guinea pigs customers. I liked it so much, I bought (a stake in) the company. The company of course is FX Capital Group which I’ve written about previously, here and here. Nigel and his team have built an extremely robust and technologically modern FX payments platform that essentially acts as middleware between any end user and their bank accounts and the enormous and highly efficient wholesale, interbank currency markets. On top of this platform, they have built two applications: FX Capital – adapted for corporate customers, and RabbitFX for private clients. In the coming weeks, they will also release their API, with the clear objective of allowing anyone to embed FX and international payments into their website, workflow or application. Indeed, one of the first target markets for their platform technology is the hundreds of FX brokers who currently struggle with poor or non-existent technology. By allowing them to focus on what they do best (generally distribution – client acquisition and relationship management) and improve the level of service to their customers by outsourcing the technology to FXCG, everyone – client, broker, FXCG – is a winner. Think of it as FXaaS (FX as a Service.)
…[FX Capital Group provides] FX-as-a-Service.
The reason for today’s post however is to announce the new RabbitFX website, which I hope you will agree looks fantastic and even more importantly is easy to use and understand. It’s not perfect (still lots of improvements and features in the pipeline) but we think it is ‘good enough’: we are confident that the user experience is better than any other specialist FX broker in the market. And this starts right from the beginning: sign up for an account today and you’ll see what I mean. For UK customers, you should be able to get everything done online; customers based outside the UK (and some UK customers) can do 90% online and will need to send some identity documentation (in order for RabbitFX to fulfill its ‘know-your-customer’ regulatory requirements.) And once your account is open, I’m sure you’ll find like I did that making a FX payment has never been easier.
This week NEA announced the close of their latest fund at $2.5 billion. That seems like a lot of money for one venture fund, although perhaps if the intention is to focus on (highly capital intensive) clean tech and/or biotech they will be able to deploy this amount effectively. Of course NEA, founded in 1978, has a long and successful track record, with I imagine many long-standing relationships with LPs and excellent ‘brand recognition’ within the universe of potential LPs, and so it is hardly surprising that they are able to raise such large funds. After all – especially with respect to institutional investors – the analog to the ‘nobody-ever-got-fired-for-buying-IBM” paradigm operates in their favor.
A couple years ago, when I first started thinking about what would become Nauiokas Park, a good friend told me that private equity was all about raising capital, not investing it. Of course I understood what he
…private equity is about raising money, not investing it.
was saying, but thought he was using hyperbole to make the point that raising capital was more important than just a means to an end (investing.)
Now I understand that however cynical it may sound, he wasn’t trying to be clever: the way the institutional marketplace for private equity (including venture capital) is structured is all about raising capital and only incidently about investing that capital.
For better or worse, the year-end is typically a time to step back and take stock, to reflect on the year that was and the year to come. And indeed I have been thinking about what we could have done better or differently last year and what we need to focus on in this new year. And the short answer is we need to spend less time thinking about the economic and industrial landscape, developing our investment framework, sourcing potential investments and nurturing our existing investments, and more time soliciting potential investors: pitching our skills, our approach and the opportunity we believe exists to people and institutions that will determine whether or not we can turn our vision into reality. And like any start-up, we are going to have to be hard-headed about how we approach this as the proverbial runway is running out. As they say, there is a fine line between tenacity and obstinacy. I want to try to stay on the right side of that line.
Of course, once the lightbulb goes on it becomes obvious that raising money would be the most important talent of any prospective private investment firm: your LP’s, shareholders, investors are your customers (and not your portfolio companies.) They are they ones that ‘pay the rent’. They consume your service which is to invest their capital. Ah but the better the service, the more customers you have and the more successful you will be, right?
Well not exactly. In investment management generally it is very hard to determine a priori the quality of service one is likely to receive, which is why so often prospective investors – be they retail or institutional – fall back on historical performance to make their judgements. This reliance on historical data is clearly imperfect. However, when considering (many types of) hedge fund or mutual fund, given the typical investment horizon and liquidity profile, a consumer of these services can at least adjust relatively dynamically if they make a mistake. The effect of this is to reduce the psychological barrier to ‘taking a risk’ on any particular investment manager in these asset classes. But given the long time horizons and relative illiquidity in private equity, investors cannot exit a decision easily and so are (even more) inclined to stick with well-established firms and are less open to considering newcomers.
Basically “track record” is the box that needs to be ticked. And is much more important than having a coherent, well-researched and plausible investment thesis. After all, if you have the money, the deals come to you. But a track record in private equity is hard to come by quickly. (And it needs to be the ‘right’ kind: the first time I was told (by a prospective investor) that having been a founding investor in two multi-billion dollar companies didn’t ‘count’ because I wasn’t “a professional investor” when I made the investments was frustrating and somewhat irritating I have to admit.)
A company active in a two-sided market provides it’s services to two distinct constituencies. Often times, they provide those services for free to one side of the market, in order to increase the value of the services they provide to the other side of the market. For example, Visa provides consumers a free payments service (and actually often pays consumers to use their service via loyalty programs, cash back, etc.); in so doing they can charge merchants to use their services which have value to the merchants because of the number of consumers who use their platform. In effect, Visa sells ‘access to consumers’ to merchants. In a different context but the same vein, Google sells access to consumers to advertisers.
Successful private equity and venture capital firms “sell” access to dealflow to their investors and limited partners. It is a two-sided market. And so it is natural that network effects apply and rational for investors to be pre-disposed to the biggest, most established players. It is reasonable to think that NEA (and KPCB, Index, etc.) or Blackstone (and KKR, Carlyle, etc.) will see a high proportion of the best deals. So far, so true. But unlike electronic payments or algorithmic online advertising, investing (in private companies) does not scale and so unlike these markets, the law of diminishing returns kicks in much, much earlier. The industry (well, much of it) admits as much: I suspect if you offered the GPs of NEA a $10 billion fund, they would probably demur. Indeed I suspect if you offered USV a $500mn fund, they would probably turn it down. The key point is that for any given private investment strategy (sector, stage, etc.) there is clearly a maximum optimal fund size. For a company like Visa or Google, this is not the case – more customers, more merchants, more searches, more advertisers – it’s all good.
Jeff Bussgang recently estimated that the (US?) population of active VC partners was approximately 1000. I don’t know how many mutual and hedge fund managers there are but I suspect it is at least an order of magnitude higher than this. This seems intuitively wrong: investing in a private company is more work and there are more of them. You have a thousand investors looking at a universe of tens of thousands (or more) of investable private companies and tens of thousands of investors looking at investing in a universe of thousands of public companies…
Paul Kedrosky (and others) have written extensively and intelligently on how the venture capital industry needs to shrink. How too much money, chasing too few opportunities has destroyed returns. The logic is compelling. However I would posit that the problem is not too much money per se, but too much money with too few and homogeneous investors.
Let’s look at these two constraints sequentially (although they are co-dependent to a large extent.) If you double the number of GPs but provide ten times more investment capital, on average the valuations of the investments they make will go up five times (thus significantly compromising their future returns.) Ah but this logic assumes a closed system – ie that both the number and types of investments are held constant, and so increasing the ‘money supply’ drives inflation (and lower real returns.)
Well in a world where the number of GPs is constrained, and most of them come from similar geographic, educational and professional backgrounds, this assumption is likely to be more right than wrong. Indeed it is embedded in the initial conditions above – ten times more capital allocated to the asset class does not result in ten times the number of GPs. And yet the number of investments any GP can effectively manage is by definition bounded (at a reasonably small number.)(Which is of course why firms like Apax eventually exited venture capital and ‘graduated’ to private equity.) Perhaps an even more important gating factor however is the number of potential investments a GP can seriously analyze and consider each year (dozens? a hundred or two?)
And we uncover the Achilles Heel of the (otherwise extremely successful) ‘Silicon Valley’ model: the relative homogeneity of the environment leads inevitably to a collective narrowing of the universe of potential investments that is considered and amongst these, an additional narrowing in the way they are evaluated and considered. ie Everyone sees the same deals and runs the same slide rule over them. And so more capital simply means valuation inflation and ultimately, lower returns.
But what if we were able to disrupt this state of affairs? Having spent the past two years intensively researching the markets we are interested in, I simply don’t accept that the ‘problem with venture capital’ is a bounded set of investment opportunities. I’m sure there is some limit to the number of good entrepreneurs, viable business models and attractive market opportunities but we are nowhere close to reaching it. In fact, it is so far away we can’t even see it yet.
No, the problem is a failure of market design. (The irony being of course if this market design failure were in any other industry, venture capitalists would be aggressively investing in companies and business models designed to correct and take advantage of this failure.) The problem simply stated is too small a number of too many similar venture capital and private equity investors. The solution is more, and more diversity. The question is how?
I’m sure you won’t be surprised to hear that I have a few ideas on the subject, and for my first (and only) New Year’s resolution, I will endeavor to articulate these in a multi-part series I will call ‘Saving Private Equity’. Some earlier thoughts on the subject can be found here.
The more cynical amongst you might accuse me of simply ‘talking my book.’ Perhaps. Probably. A more flattering way to look at it is that I am living my convictions. And the lesson I’ve learned is that we need to focus almost exclusively on fund raising for now even if that means disappointing some of our portfolio companies or missing out on a great investment opportunity in the short term. It’s not fun or particularly interesting but like almost any other startup, without capital the rest is just theory. Time to stop thinking and start pitching!
So my question is when does Amazon.com split its retail operations from its AWS platform business. I’d love to see these priced separately. Actually, truth be told, I suggest Amazon.com is actually three businesses:
Earlier this year I suggested that AWS in particular could well be the totemic representative technology that inaugurates the sixth techno-economic paradigm:
Just as Intel’s 4004 microprocessor was the catalyst for a wave of creative destruction in the 70s and 80s, will AWS prove the same for the 00s and 10s? Probably. We’re seeing it already. And it’s going to disrupt the hell out of the mastodons of industry across most sectors of the economy. Why? Because their cultures and leaders are entirely ill-equipped to face such a fundamental paradigm shift. They know how to play by the old rules. The strategic competitive advantages they built up over decades risk suddenly – poof! – to become obsolete.
The central concept in this new option is that of the Spot Price, which we determine based on current supply and demand and will fluctuate periodically. If the maximum price a customer has bid exceeds the current Spot Price then their instances will be run, priced at the current Spot Price. If the Spot Price rises above the customer’s bid, their instances will be terminated and restarted (if the customer wants it restarted at all) when the Spot Price falls below the customer’s bid. This gives customers exact control over the maximum cost they are incurring for their workloads, and often will provide them with substantial savings. It is important to note that customers will pay only the existing Spot Price; the maximum price just specifies how much a customer is willing to pay for capacity as the Spot Price changes.
Spot Instances are ideal for Amazon EC2 customers who have workloads that are flexible as to when its tasks are run. These can be incidental tasks, such as the analysis of a particular dataset, or tasks where the amount of work to be done is almost never finished, such as media conversion from a Hollywood’s studio’s movie vault, or web crawling for a search indexing company. For most of these tasks their completion is not time critical and as such they are ideal targets for additional cost savings.
Before I go any further, let’s just say it’s pretty exciting to see vision become reality even if in this case I’m only a distant spectator. Markets in anything. Digital markets. Themes that go back to the founding mission statement of the Park Paradigm:
(December 2005) The technology of the digital age is driving an unprecedented explosion in the ability to create markets in anything. Trade anything. Not just physical goods. Not just financial instruments. But ideas. Events. Outcomes.
The emergence of these kinds of markets will – over time – impact how we view and interact with the world in all aspects of our personal and professional lives. They will fundamentally alter the current world economic and social paradigm.
Chris Swan calls them virtual resource markets and correctly points out that, at least for now, the market is “closed” – ie users cannot trade their capacity amongst themselves, however I suspect that it is just a matter of time before such a market is organized. But what would be even more useful (and exciting) than a closed market on Amazon EC2 resources, would be an open marketplace for on-demand spot computing resources. ie A marketplace which is agnostic as to where the compute resource comes from, so long as it is a robust and more or less uniform resource.* However for this to be useful for the end consumers of this computing commodity, the ability to switch automatically and seamlessly from one cloud computing source to another based on price and/or availability would be crucial. Indeed this would be the key value driver for anyone hoping to operate a compute resource exchange. Sure the price discovery and transaction mechanisms would be necessary but these are relatively trivial to build and hard (in isolation) to monetize. The real value creator for any exchange (just ask the CME) lies in clearing and settlements. (For the non-financial amongst my readers this is the back-end of the trade, fulfillment essentially.)**
Note, however, that this feature is not market-based pricing. Amazon determines the spot price and can raise that price enough to gain back capacity at will, at no real cost to itself. There is no competition. There is no commoditization. There is just consumption of what is not being used.
The truth is, real commoditization of infrastructure services–or any other cloud service, for that matter–isn’t in the best interest of Amazon or any other service provider.
Regardless, commoditization can’t happen without open standards that allow easy portability and interoperability of data and code, as well as security, control, service-level assurance and compliance systems. Those standards are coming, but it is impossible to predict when they will arrive. I only hope Amazon embraces them when they do.
I’m not sure I agree with his view however that commoditization isn’t in the best interest of Amazon. The underlying asset is ultimately relatively undifferentiated (a compute cycle is a compute cycle is a compute cycle) which is in fact the definition of a commodity. If you are a provider of a commodity – unless you can maintain a monopoly or a cartel – it is in your interest to create as big and vibrant a marketplace as possible. Supply creating demand. And particularly if you fancy yourself the most efficient, large scale producer of said commodity (as I’m sure Amazon does), all the more reason to want a big, liquid market of consumers. It is the exchange and clearer that want to create lock-in, not the producers. To be fair, for the moment AWS is both and indeed this is the point James is making I think, but I would be surprised if they had the intention (hubris?) to think this is anything but a transitionary arrangement.
Of course, as a traded market in this critical 21st century resource develops over the next decade and beyond, the business opportunities abound. Better yet, many of them are well known and can quickly be adapted (from other asset markets) to apply to the compute resource market. It’s not a business yet, but it only took a few hours before the first ticker tapes(here also) began to appear for EC2 pricing:
An entire ecosystem will surely emerge – exchanges, prime brokers, risk management derivatives, algorithmic trading… I’m sure there will also be some interesting second-order opportunities. Linking spot computing prices with spot electricity prices. Selling green compute cycles (ie powered by renewable energy sources only.) Allowing anyone to sell compute cycles into the grid (think SETI@home meets micro-generation). The mind races.
Welcome to the sixth paradigm.
* like a bond futures contract, one could imagine allowing any compute resource fitting a certain minimum specification into the “basket” of deliverable resources; typically in this scenario there would be a “cheapest-to-deliver” resource in the basket which presumably would get allocated first.
** I can’t help but wondering if the amazing technology developed by our portfolio company CohesiveFT couldn’t be adapted or re-purposed to form the core fulfillment engine of a compute resource exchange. The fact that they are Chicago based and their CEO/Founder is ex-O’Connor makes me wonder even more!
A couple of months ago, I had the privilege to have been invited to speak at eComm 09 in Amsterdam. I have posted on this previously but recently the video of my talk was posted and perhaps will make it easier to understand my accompanying presentation. If you can spare 20 minutes (there is an additional 10 minutes of q&a at the end) and are interested in understanding how Nauiokas Park defines our opportunity space, please have a look as it is probably the most succinct expression of the worldview we bring to investing and analyzing potential investment opportunities.
And here is the presentation again, in case you would like to follow along as you listen to the video:
Well-built developer platforms are the future of every industry. (-ReadWriteWeb)
Note: Their is a small glitch around 7:40 where the video skips over a few seconds; funnily enough (for the conspiracy theorists out there) this is exactly where I say that had ZSIN’s existed, the extent of the disasters that occurred in the mortgage securitization markets would have been at least an order of magnitude smaller…)
Anyone who has ever used an Apple product understands that a key part of the value flows from the design aesthetic that covets simplicity, intuition and beauty; harnessing these attributes to provide solutions and services that users find a joy to use right out of the box. The complexity of their products is hidden from view, Steve Jobs having understood that the extra effort needed to transform complexity into simplicity was something that created tremendous value both for his customers and his shareholders.
Creating simplicity is hard. Much harder than creating complexity. Entropy and all that. But it is very often worth the effort. Helpfully, John Maeda wrote a great guidebook “The Laws of Simplicity” where he articulates 10 basic laws:
Reduce: The simplest way to achieve simplicity is through thoughtful reduction.
Organize: Organization makes a system of many appear fewer.
Time: Savings in time feel like simplicity.
Learn: Knowledge makes everything simpler.
Differences: Simplicity and complexity need each other.
Context: What lies in the periphery of simplicity is definitely not peripheral.
Emotions: More emotions are better than less.
Trust: In simplicity we trust.
Failure: Some things can never be made simple.
The One: Simplicity is about substracting the obvious, and adding the meaningful
Finance and financial markets are often complex. This complexity can arise within products (exotic derivatives), infrastructure (clearing, settlements and payment platforms) or regulation. And most financial services firms (and professionals) revel in this complexity. Not only do they not seek to hide it away, but they often compete vigorously to show it off in all its glory (and of course by association they seek to validate their virility and cleverness by navigating all this complexity on behalf of their hapless customers.) Of course – sticking with the computing metaphor – this ‘look how clever I am’ approach is very Microsoft-ian (and no, that isn’t a compliment) and very rarely does it provide the most utility or best value for the customer. So one of our key investment themes is to find and nurture companies who are to finance as Apple is to computing (and media!) The complexity of modern finance and markets is the ideal substrate for simple products and services, to quote John:
Simplicity and complexity need each other. The more complexity there is in the market, the more that something simpler stands out. And because technology will only continue to grow in complexity, there is a clear economic benefit to adopting a strategy of simplicity that will help set your product apart. That said, establishing a feeling of simplicity in design requires making complexity consciously available in some explicit form. This relationship can be manifest in either the same object or experience, or in contrast with other offerings in the same category—like the simplicity of the iPod in comparison to its more complex competitors in the MP3 player market.
One of our portfolio companies does exactly this. They take a simple service, using technology and their market knowledge to engineer a solution that keeps the complexity away from the customer and behind the scenes. (Where it should be.) A solution that embraces simplicity and transparency in a market heretofor characterized by complexity and obfuscation. It’s not a new music site or social network. It’s probably not something anyone would get too excited about. It’s boring. But it’s big. Billions big. And important. And for many individuals and corporates, unavoidable.
The service is foreign exchange (aka FX) and international payments. And the company, as you might now have guessed, is FX Capital Group. (See also my FX 2.0 post from this spring.) And the reason I am writing about them today is that they have just launched their new website and online trading platform and it is by far the best FX user experience I have seen. Simple. Transparent. Complete. Easy-to-use. From the initial client take-on, all the way through to the onward payment to the account of your choosing, every last detail of the process has been engineered to make the customer’s life simple. The “iTunes of foreign exchange”. After all selling one currency to buy another should not be that hard.
And now, it isn’t.
FX Capital Group’s vision is to combine technology and traditional phone base services with competitive and transparent pricing to deliver on the promise of simple, cost effective, and customer friendly foreign exchange and international payments services for clients.
Leveraging experienced individuals, the best technology and a deep understanding of both international foreign exchange and payments markets, FX Capital Group brings transparency, simplicity and automation to meet the foreign exchange needs of clients in a robust, easy and effective manner.
Buy, Sell and Hedge Currencies: A full range of phone based and online services to buy/sell currencies and hedge currency risk. Competitive, consistent and transparent pricing for all customers.
Manage Currency Risks: Guidance on strategies to hedge currency risk within your business. A great service for firms who contract in multiple currencies or import / export goods and services.
Sell on Your Website in Multiple Currencies: Expand your online customer base by selling to customers in multiple currencies using our real-time FX API’s at rates that are better than those “bundled” with merchant service providers.
Invoice in Multiple Currencies: Invoice your international clients in local currency. Embedded hedging of any currency movements and no need to maintain bank accounts in multiple currencies.
Make International Payments: Our international payments service (online and phone) will save you money over you bank for making international payments and may be free if you transact your FX with us.
And other brokers and financial intermediaries are also welcome to partner with FX Capital Group, either via API or white label agreements. Indeed, first and foremost this is very much a platform company, FXaaS really. The customer facing website is in fact just an implementation of the underlying platform, and shortly the company will be launching the second implementation – RabbitFX – which will be tailored specifically to private and retail clients. Going forward we hope that many other partners choose to build innovative and customized services on top of the core FXCG platform. We also are excited by the ability for partners to integrate FX into their products and workflows simply and powerfully. Imagine for example an ERP provider, or online accounting services, or an ad network, etc. etc. …the list of potential partners is almost endless.
One area that is particularly close to my heart is the ability to allow even the smallest start-up to offer their customers payment in any currency – easily, cost effectively and transparently. Or helping start-ups with geographically dispersed operations pay employees, contractors and suppliers in any currency without having their eyes ripped out by their bank or payments provider. I’m sure most of the seedcamp finalists from the last few years have foreign exchange payments to make from time to time, many on a regular basis. In the spirit of helping to get the ball rolling on this front, I’ve convinced them to sweeten the bargain for all the companies that have applied to seedcamp (or mini-seedcamp) over the past three years.
If you have been a seedcamp applicant, finalist or winner, if you open a corporate account and do a trade before December 25th, FX Capital Group will send you a £25 iTunes or Amazon gift card and also contribute £25 to the charity of your choosing. Just let them know when you register for which seedcamp event you applied or attended. They’ll do the rest. And then sit back and save time, money and energy and never worry about managing FX payments again.
Like all good start-ups a big part of the excitement and frustration is knowing what is ‘in the pipeline’ and wanting it all to be released to users ‘yesterday’. However we also know that the best ideas and certainly the best prioritization algorithms emerge from getting a product into the wild and so after 9 months of development and private alpha, I can’t wait to hear ways in which customers and developers will want to use the platform. So for all you early adopters out there, know that the platform is probably not perfect (although we’ve stress-tested it up to 250,000 trades a day without any problems, which gives us a bit of headroom to grow into! lol) but (we think) it’s damn good and would rather challenge you to help us make it even better than pretend we’ve got it all figured out.
In case you were wondering, the team is indeed working on putting a screencast/video demo of the trading platform online and but in the mean time they are more to happy to walk you through a short online demo if you are interested. Alternatively you can go yourself to https://demo.fxcapitalgroup.co.uk/ and use the following credentials:
username: demo@splashypants
password: demosplash
pet’s name: splashy
favorite animal: whale
favorite city: atlantis
Have a go and be sure to let the team know what you think. Best channel is probably twitter where you can find them at @FXCapitalGroup or on Facebook.
Finally it’s important to make clear that I’m not just writing this post as an investor, commentator or director but first and foremost as a customer. My entire adult life I have had to deal with managing FX risk and struggle with the pain and cost of doing international transfers. When the founder Nigel Verdon came to me with his vision, I thought ‘Hallelujah!’ – at last. It may not be the sexiest business in the world but there is real pain and real profits to be made in using technology to disrupt the old way of doing business and give customers a better deal. And so I did a ‘Victor Kiam’. So next time you have to make a foreign payment, whether its for yourself or your company, give FXCG/RabbitFX a chance, I’m sure you won’t be disappointed.
Using the tried and tested TED 20min format, it was a great opportunity for me to collect my thoughts into (what I hope was) a coherent overview of how I think technological and economic forces will shape the optimally adapted ‘industrial stack’ for the sixth paradigm. It’s a great summary of the prism through which we look at potential investment opportunities and I hope will help us articulate this more powerfully to entrepreneurs and prospective investors.
I’d love to hear any feedback (good, bad and ugly) from any of the eComm delegates who saw my presentation and hope to continue the conversation with you and others here. You can also follow me on twitter @nauiokaspark.
Thanks to Paul and Lee for inviting me and especially to those of you who took the time to respond to my call for input – it was tremendously valuable in helping me to shape and refine my thinking and in building the presentation; just a few years ago, assembling this kind of distributed brainpower would have been impossible, and I hope I never lose my ‘childlike sense of wonder’ at the boundless possibilities that technology enables.)
I was very kindly invited by Paul and Lee to attend my first ever eComm conference, which will be in Amsterdam from October 28th to 30th.
The Emerging Communications (eComm) Conference & Awards was created to promote and accelerate communications innovation. Telecom, mobile and to a lesser extent, Internet based communications, had been innovation stagnant for far too long. Yet the opportunities for innovation had never been greater. Those opportunities are only going to grow as drastic changes further impact the multi-trillion dollar a year telecom industry.
The speaker line up looks fantastic and I’m the spare tire on an otherwise star-studded panel Thursday afternoon, that is if they still want me after my plenary talk that morning at 9:30:
Platforms, markets & bytes: the economic landscape of the 6th paradigm(?)
In a world where everything can be expressed as 0s and 1s, are the traditional ways of defining sectors and industries (as verticals) still relevant? If not what new business models and industry structures are likely to emerge? Oh and what’s the difference between a bank and a telecom company really?
Now at the risk that tumbleweeds blow through the comment section, proving once and for all that all my dear readers are in fact spambots (but in which case no one will see this and no embarrassment suffered), I thought I’d take a page out of the legendary Fred Wilson’s book and ask you all for thoughts and comments on this theme that I might incorporate them into my presentation. (Or not!) So fire away!
Today Markit Group announced that General Atlantic has invested $250 million, valuing the 7 year old company at a whopping $3.3 billion. Founded by Lance Uggla, Kevin Gould and Rony Grushka in 2003 to address the growing need for quality data in the burgeoning credit derivatives market, what followed was several years of unbelievably good execution and disciplined acquisitions which has positioned the company as a critical component at the heart of the trillion dollar OTC derivative markets. The products they provide aren’t considered sexy (something that is often given all too much importance in this status conscious industry) – but their data, valuations, indices, trade processing and other products and services are the plumbing that is key to the continuing operation of many financial markets. They are a great example of creating value by building a great platform and understanding how to monetize data. I had the good fortune to be a non-executive director from 2003 to 2006 and I can say without hesitation that this team is one of the best I’ve ever seen and fully deserve the success they have achieved. (Congratulation guys. Awesome, truly awesome.)![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_c.png?x-id=2289b14f-e2bb-4fc6-bf72-e2826b3127f9)
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